China wants its currency
To dominate world trade and investment
And beat the US dollar
But will that actually happen?
Welcome to China Uncensored.
I’m Chris Chappell.
Since the end of World War II, the US dollarhas been the world’s most important global reserve
currency.
That’s the currency that much of the world uses to conduct trade, investments, and other
business.
“In foreign exchange markets, where currencies are traded, dollars are involved in nearly
90% of all transactions.”
That means a significant amount of US dollars is held by central banks in different countries.
And that most of the world considers the US dollar the safest way to hold their money.
Well, until I release my long-awaited Chappellcoin.
Look, if people will buy Dogecoin, they’ll buy anything.
But the US dollar’s dominance gives America tremendous power and influence over other
countries, especially with its ability to impose unilateral sanctions.
Cut off a country’s access to the US dollar, and you can block most transactions.
But now, people are worrying that China’s yuan will replace the dollar.
There’s talk that the US dollar’s reserve currency status will not last.
Because more countries are seeking alternatives to the US dollar.
One alternative being the Chinese yuan.
I’m not saying it’s a good alternative.
It’s kind of like having to substitute sugar-free, low-carb, fat-free ice cream for the good
stuff.
But sometimes you have to when you’re forced to go on a diet.
Like Russia.
Russia has turned to the Chinese yuan after the US imposed sanctions for its invasion
of Ukraine.
This has already been in the works since the US imposed sanctions after Russia’s invasion
of Crimea in 2014.
And even more so after additional sanctions in 2018.
Other countries have made agreements to trade with China in yuan as well.
Those includes Pakistan,
Iraq,
And most recently, Brazil.
On top of that, China also just successfully paid for liquefied natural gas from the UAE
in yuan for the first time, which made the news, too.
With all the hype about the yuan, you may be led to believe that its yuan will someday
become the dominant currency that countries use for trade and investment.
Chinese state-run media certainly wants to make you think that way.
The Chinese Communist Party has been pushing the yuan as a global reserve currency for
years, now.
Having more countries trade in yuan instead of dollars would benefit China in a lot of
ways.
Most important, it would allow China to be less reliant on foreign institutions and international
payment systems like SWIFT.
So if the Chinese Communist Party and its officials keep getting sanctioned for things
like, you know, committing genocide, they can still make money.
And if more countries ditch the dollar for the yuan, it would also help China keep sensitive
information secret—like how money is flowing globally.
Which is a great way to keep shady things like the CCP’s drug trade, bribery, and
money laundering out of sight.
Many say the US dollar is already being threatened by China,
and that the US would face a reckoning if its global supremacy erodes.
But that’s assuming that China’s yuan is even capable of being a global reserve
currency.
But it’s more challenging than they want to admit.
More on that after the break.
Welcome back.
Since around 2010, China has been promoting its currency as an alternative to the US dollar.
Chinese state propaganda claims the yuan is on track to become the currency of choice
for global trade.
China has also created its own international payment alternative to SWIFT, the global payments
system.
And China has even been making deals to buy oil and gas in yuan.
The impression some people get from this is that the global monetary system as we know
it is coming to an end, with the US dollar losing supremacy and the Chinese yuan rising.
But even though China likes to hype up the yuan as a global currency, it has a lot of
problems.
“Before the yuan can become a global currency, it must first become a reserve currency held
by central banks around the world.”
But the yuan will never achieve world currency domination, much less be a reserve currency—as
long as the Chinese Communist Party is in power.
For now, China has a long way to go making the yuan come even close to being as influential
as the US.
For all the hype,
the yuan, or RMB, only makes up 2 percent of world payments, compared to 41 percent
in US dollars.
As for official foreign exchange reserves—only about 2.5 percent are held in yuan compared
to 60 percent in US dollars worldwide.
And as for its own international payment system, it pales in comparison to SWIFT.
China’s system “has a tenth of the number of participants and doesn’t even process
[half of one percent] of the volume of transactions.“
Which is why China still relies on SWIFT for a lot of its own transactions.
That’s embarrassing.
It’s like Elon Musk driving around in a Toyota because it’s just more reliable.
The harsh truth is: people don’t really want to use the yuan.
When it comes to choosing which currencies to hold, central bankers around the world
have to consider a number of risks: credit risk: the chances of a borrower defaulting
on their debt.
Currency risk: the chances of losing money from changing currency value.
And liquidity risk: the chances that an asset can’t be sold and converted into cash fast
enough when it’s needed.
It all comes down to trust.
The reason why the US dollar continues to stand strong is because nearly everyone trusts
that the US government will not default on its debts, and that the dollar will continue
to have stable value under good, transparent economic management.
It’s also trusted to convert assets into cash easily, because US dollars are easy to
get and easy to use.
The US government doesn’t maintain tight control over the value of the dollar.
They let the dollar be exchanged and traded freely.
Unlike how the CCP treats the yuan.
China puts heavy restrictions on how much money people can move out of the country at
once.
The goal is to prevent its richest citizens from fleeing with all their cash.
But those same restrictions make yuan a lot less appealing to foreign banks and trading
partners.
And like I said, China also heavily controls the yuan’s value compared to the US dollar.
They artificially keep it weak, to help Chinese exports compete globally.
The CCP will never let the yuan trade freely on the Foreign Exchange Market.
That’s because they use control over the yuan to keep the Chinese economy going.
If they let the yuan trade freely, it would crash the Chinese economy.
Manufacturing would slump, real estate prices would plummet, and many smaller banks might
collapse.
But having a currency that can flow freely is the basic requirement for a global reserve
currency.
Again, the Chinese Communist Party can’t do that.
They can’t let go of that control.
So if asked, “Can central banks trust that Beijing would maintain its commitment to the
free flow of foreign capital if it were faced with a major financial crisis?”
The answer is, of course, “not!”
The Communist Party’s own stability and domestic control would always come first.
And that’s why people who understand the Communist Party’s behavior don’t think
the yuan could ever be a major reserve currency.
Even Middle Eastern oil producers are hesitant about making the yuan the go-to currency.
Keep in mind that news coverage about China offering yuan-based oil trade with the Middle
East is only just that: an offer.
While Saudi Arabia did say it was considering accepting the yuan
That doesn’t mean that it actually is, as far as we know for now.
As I said before, the yuan isn’t freely tradable, and it’s run by an opaque and
unpredictable authoritarian regime.
Middle Eastern countries may not love the US—especially the US prodding them on human
rights issues.
But they also hesitate to do a lot of trade in yuan.
It gives China too much arbitrary power.
Especially when China tries to manipulate local commodity prices whenever prices go
above its pain threshold.
It’s not just the Middle East that prefers US dollars.
As nice as it may be that China’s helping Russia get around US sanctions by pumping
yuan into it, Mark Sobel, US chairman of the Official Monetary and Financial Institutions
Forum, said Russia’s use of the yuan is “a sign of its desperation”—not a sign
that they actually *prefer* yuan.
“Even if the yuan’s role in trade settlement in the region rises, the yuan’s global usage
will continue to remain extremely limited given the lack of openness and convertibility
as well as the presence of a plethora of capital controls, in addition to investor skepticism
about Chinese protections for property rights.”
A communist regime that doesn’t care about property rights?
You don’t say!
George Magnus, a research associate at Oxford University’s China Centre , says , “It’s
highly likely Russian citizens and firms would still give their right arm to get access to
US dollars, rather than yuan.”
So really, the yuan’s international role is destined to remain small, never global—so
long as the CCP remains in power.
It’s basic economics.
So why are we seeing so much hype about the yuan overtaking the dollar?
Here’s my theory: the CCP is hyping up the yuan as part of its propaganda war against
the US.
It wants to make it seem inevitable that China’s economy will overtake the US.
But even if people don’t really think China will beat the US anytime soon, if the CCP
can make people lose confidence in the US dollar, that’s still a big win for them.
It seriously weakens the US.
Like I said earlier, it’s all about trust.
And this show is possible obly because of viewer support.
So as a thank you to my wonderful fans who support China Uncensored through the crowdfunding
website Patreon or the exclusive social media platform Locals, I’ll answer one of your
questions:
Today’s question comes from David Michael White on Patreon: “Chris, what would you
do if you woke up one morning only to discover that Earth has been dominated by pandas with
human-like intelligence?”
Pandas with human-like intelligence?
That would be pretty scary.
But not as scary as what we have now on Wall Street: Humans with panda-like intelligence.
Particularly those people who think it’s a good idea to keep throwing money into China.
Thanks for your question, David.
And thanks to everyone else who supports China Uncensored through Patreon.
Join us at Patreon and contribute a dollar or more per episode.
You’ll get a lot of cool perks, including me answering your questions on the show.
Check out Patreon.com/ChinaUncensored.
Once again I’m Chris Chappell.
Thanks for watching China Uncensored.