In March 2009, China and Russia asked for a new global currency to end the dominance
of the US dollars.
China and Russia desired a single global currency that was separate from particular states and
can remain stable over time.
The governments of the globe, however, were unable to agree on a new global currency,
and the US dollar remained the preeminent currency for global trade as well as for central
banks in all other countries . After that, several times a year, speculations
of the dollar's demise appear.
In fact, rumour has it that the China wants the Yuan, its currency, to replace the dollar
as the world's reserve currency.
China is taking steps to achieve this as its economic power develops to gain more influence
over the world.
So, Are all these rumors true or not?
If it’s true, how, and when would it happen?
And if it’s not, then what are the hurdles?
Let’s find out…
In 1944, more than 700 representatives from 44 countries travelled to the Mount Washington
Hotel, They arrived as World War II drew to a close to hammer out a new financial structure
for the global economy.
Out of Bretton Woods came the World Bank, the International Monetary Fund and, most
importantly, a new role for the U.S. dollar: "international reserve currency."
It became the main currency the world uses to trade and save.
US dollars is now the most widely used currency in the world, with central banks, affluent
individuals' cash holdings, and money laundering all using it.
According to a report of European Central bank roughly 40% of international trade transactions
in goods are invoiced in US dollar.
As of 2020, more than 90% of forex trading was conducted in dollars; banks hold more
than 60% of foreign exchange in dollars; half of all dollars in circulation were used outside
the US—particularly in Latin America and former Soviet countries—and more than half
of global trade will be conducted in dollars.
The benefits of the US dollar over the yuan are enormous when the facts are considered.
The United States' reserve position is largely determined by the size and strength of its
economy, as well as the dominance of its financial markets.
Despite massive deficit spending, trillions of dollars in debt, and unrestricted dollar
printing, Treasury securities remain the safest method to hold money.
The world's trust and confidence in the United States' ability to pay its debts keeps the
dollar as the most redeemable currency for enabling global trade.
But we have seen China as an economic miracle…
China appears to be on track to surpass the United States as the world’s largest economy
sometime in the 2030s.
And its currency is gaining traction on the global stage like never before.
According to China's General Administration of Customs, the country's trade was worth
roughly $6 trillion in 2021.
The Yuan Is Slowly Being Traded in Foreign Markets
Chinese policymakers are beginning to make trading the yuan in foreign exchange markets
easier.
And to do so, China backed the Renminbi Trading Hub for the Americas on March 23, 2015.
China's currency system is known as the renminbi (yuan is the name of each individual unit
of currency).
This makes yuan transactions in Canadian banks easier for North American businesses.
China established comparable trading hubs in Singapore and London as well.
Many African countries and some in the Middle East utilise the yuan as a reserve currency,
and central banks hold some of it as a reserve currency.
In fact, China has persuaded 14 Southern African countries, including Zimbabwe, to trade in
Chinese Yuan and preserve it as a reserve currency.
In recent years, in a new oil contract, Saudi Arabia and China are looking to use the yuan.
In fact, Saudi Arabia is rumoured to be finalizing the implementation of a deal with China to
settle oil transactions in yuan.
Then there is Digital Currency…
The Chinese are employing yet another strategy to overtake the US dollar.
On the 4th of January 2022, China launched its digital currency.
The Digital Yuan, the country's digital currency, is accessible to the public via a smartphone
application.
China has been stepping up its efforts to push out a digital currency issued by its
central bank.
According to CNBC, China's nascent digital yuan is expected to challenge the dollar's
dominance of international trade settlements in the next decade.
Within the next ten years, the digital Yuan is expected to have one billion users.
The United States and other western countries are unlikely to embrace the Chinese digital
Yuan.
However, Asian and African countries are already placing their hopes in it to end the US dollar's
long-standing dominance.
Another significant country that is assisting China in depreciating the US dollar is Russia.
Russia is currently taking dollars from its national reserve.
In just one year, it depleted its reserves by $100 billion, converting it to euro and
yuan.
What Russia is doing is helping China increase Yuan’s worth in the international market
and decrease the dollar’s value.
So, Does this imply that China’s goal of making
the yuan the world's currency can result in the dollar's demise?
Is its rate of expansion sufficient to dethrone the US dollar?
Both yes and No.
Given that China is the world's largest trading nation, with over 125 countries claiming China
as their top trading partner, the answer is almost certainly true.
However,…
For decades, the US dollar has served as the world's reserve currency.
That isn't something that is going to change overnight.
Yes, China's economy is strengthening, but it will take time to build the trust and reputation
required for countries to commit trillions of dollars of trade to a new currency.
And there are a number of hurdles to stop its Yuan from replacing US dollars as a global
currency.
Let’s take a look at them…
Firstly, one of the major problems is that…
China must make Yuan a reserve currency before its Yuan can become a global currency.
The US dollar rests on the backs of over 310 million people, whereas the yuan is spread
across 1.3 billion Chinese people.
Moreover, the US dollars is not just "the world's reserve currency."
It is “the world's major reserve currency” accounting for roughly 60% of global foreign
exchange reserves, while the yuan is accounted for nearly 3% of the global reserve.
The Yuan is a currency with limited worldwide liquidity.
There aren't nearly enough Yuan in circulation to lubricate all global trade and investment.
To put it another way, China's financial reserves are insufficient to meet global demands
So, how can China bridge this enormous gap between their Yuan and the US Dollar in order
to become the global currency?
Or how would China deliver enough yuan to the rest of the world?
Another biggest challenge, if it wishes to be more widely utilised in international trade,
is that its value is determined by the Chinese government rather than market forces.
China maintains tight control over the yuan, and its financial markets and institutions
remain a relatively 'closed economy.'
The United States has an open economy in which money can flow in and out at will, the Chinese
government restricts money flow out of the country.
So, people who use it must trust the Chinese government not to change its value in order
to favour China, which would disadvantage one of the transaction's sides.
This is the polar opposite of what people desire in a trade currency: open, transparent
methods based on market forces to determine value.
We can say that the yuan is still a baby, fragile without the protection of the government.
When compared to the dollar, which is an adult capable of comfortably walking through the
tough streets of open markets.
The third hurdle is political stability…
Checks and balances, equal power, and honesty are all features of the US political and governing
system.
Regardless of what its policies suggest, there is no reason to expect that the US government
will collapse very soon.
This is one of the reasons why the US dollar will continue to be a safe heaven for investors
and savers around the world.
The dollar has shown to be a reliable store of value.
So, would China be able to provide the same level of confidence in the yuan?
Many people in the Western world would answer no.
China's political stability is questioned due to single-party dominance, lack of universal
suffrage, and the lack of an orderly and peaceful transfer of power mechanism.
Moreover, To be an international trading/reserve currency,
China will have to run persistent trade deficits, and that would involve a massive restructuring
of the Chinese economy.
The Yuan is not freely convertible, either due to restrictions or because some jurisdictions
are not in a position to process yuan transactions with adequate flexibility.
So, China would have to abolish capital controls in order for it to be completely convertible.
And that isn't likely to happen anytime soon.
Lastly…
If the market share of dollar declines dramatically it will leave room for a huge variety of currencies.
For example, if the US dollar falls out of favour, other currencies, such as the Euro
and the Yen, would vie for the top spot.
According to the IMF research, while China's currency is gaining ground, there is also
a noticeable move into currencies such as the Australian dollar, Canadian dollar, Singapore
dollar, Korean won, and Swedish krona.
As a result, the Chinese Yuan would not replace the US dollar as the dominant currency, but
the basket would diversify with a group of currencies that would gain a greater proportion
of global trade as the dollar's market share declines.
Hence, any sentimental analysis or rumour that the Yuan will overtake the dollar in
the near future is just fictional.
So, we can say that…
Yuan may become a major global reserve currency in the coming years.
And the most it can do to the dollar is gobble up a portion of global dollar reserves through
bilateral agreements.
Other than that, the yuan, at best, will elbow out the other major currencies as a world
reserve currency, but not the dollar.
Do you agree with us, or have a different opinion on this global currency war?
Let us know in the comment section below.
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