China makes progress in challenging U.S. dollar hegemony

The author is the chief economist of Enodo Economics

China has tried to turn the renminbi into an international currency and reduce its dependence on the U.S. dollar. It’s trying again now, this time the situation may really be different.

Efforts to overthrow the U.S. dollar are largely based on China’s technological prowess.The banking industry needs to develop the necessary financial infrastructure, the country’s world-class mobile payment system, and the successful launch of Digital edition The appreciation of the renminbi will make it easier to use and promote the renminbi outside of China.

This method is unorthodox. But if Beijing’s pursuit succeeds, it will disrupt the dollar-dominated global order, at least within China’s geopolitical sphere of influence, and challenge the way the United States exercises power.

Given that China is the second largest economy and the world’s largest trading nation, the renminbi should be used more widely than it is now. However, Beijing’s determination to retain capital controls prevented it from taking the traditional path of reserve currency status.

China is still restricting capital flows. Why does the yuan have a bright future?

The reserve currency must act as a medium of exchange, a store of value, and a unit of account. according to The history of Mark Carney, the former governor of the Bank of England, shows that the most important of these attributes is the first.

Since its first failure to challenge the U.S. dollar from 2009 to 2015, China has made progress in establishing a RMB digital payment system that is cost-effective and easy to use, and meets Carney’s useful standards.

The People’s Bank of China’s digital renminbi preparatory work is progressing smoothly, initially serving the domestic economy.But the central bank also Serving Work with counterparts in Hong Kong, Thailand, and the United Arab Emirates, as well as the Bank for International Settlements, to use digital transaction ledgers distributed among counterparties. The purpose is to use the central bank’s digital currency to make multi-currency cross-border payments easier and cheaper.

Success will depend in part on whether other countries are willing to accept China’s financial innovation, and Western countries are likely to resist it. But the benefits provided by the project should be particularly attractive to emerging markets, which are underserved under current arrangements, and the “correspondent” bank often acts as an intermediary for another bank to facilitate transfers.

Although financial markets are worried that unprecedented fiscal and monetary stimulus measures will cause inflation in the United States and harm the U.S. dollar, China has also made progress in increasing the attractiveness of the renminbi as a store of value and establishing its status as a stable, low-inflation economy. .

What is important is that central banks and financial institutions that view the renminbi as a reliable store of value now have more control to express their views. China has opened up its capital markets more to foreign investors, which has triggered a large inflow of funds into stocks and bonds in the past few years.

Yes, China retains capital controls. However, the successful launch of the digital renminbi will be firmly controlled by the People’s Bank of China, and it is likely that the Communist Party will be more willing to relax its control, because the authorities will have a full understanding of two-way flows.

Finally, the function of the renminbi as a unit of account has also been enhanced since the initial efforts to internationalize the renminbi.RMB-denominated trade pricing still needs to return to the 2015 peak level, but at the same time, China has launched RMB-denominated futures contracts for a variety of commodities, including oil with Gold.

Those who doubt that the renminbi will become a reserve currency will point to China’s lack of rule of law, lack of independent institutions, and the opaque and unpredictable policy making of authoritarian regimes. But those who doubt whether the U.S. dollar can continue to be the undisputed top currency need only point out the United States’ recent attacks on democratic institutions, which are also an indispensable basis for the status of a reserve currency.

China is now working hard to use its reputation for payment innovation to open up a range of currency influence, which is not defined by common interests or political culture, but by shared infrastructure and technical standards. Although the benefits can be changed, the hard-wired digital and economic connections are more difficult to break once established. And China enjoys a first-mover advantage.

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