Although the dominance of the dollar that has ruled the financial world for decades is unlikely to change in the near future, the dominance is about to be what it was in the recent past. (Shutterstock)

In the summer of 2014, one year after Xi Jinping ascended to power in China, China began to respond to American demands for the Chinese Communist Party to reduce its grip on the Chinese yuan (1), as the Americans, and behind them the World Bank, have long believed that The value of the Chinese currency is not commensurate with the size of the second largest economy in the world, and what is more dangerous than that is that the Chinese are deliberately devaluing their currency to enhance their exports, as cheap products attract various markets, which opens up great prospects for export. All of this has ultimately made China more like the world's factory, and while China denies these accusations, economists believe that this policy is based on the fear that China feels from the Japanese experience (2) in the 1980s, when the sharp rise in the price of the Japanese yen hindered its country's economy, which is a lesson. They kept him in mind.

However, there was a common interest for American and Chinese leaders in responding to each other, as Xi Jinping wanted to adopt the yuan as an international reserve currency like the dollar, the euro, the British pound, and the Japanese yen, and this was part of a long Chinese strategy aimed at using the yuan globally. And slowly liberation from the dollar’s ​​control over the global economy. In 2016, the United States agreed to include the Chinese yuan (3) in the elite club of reserve currencies of the International Monetary Fund, appreciating that no matter how much progress China has achieved, its path is not completely paved to displace the dollar, because its efforts collide with several established facts on the ground and structural crises in the world. Its economy, and most importantly, a strong party that has the ability, desire, and willingness to maintain the dominance of its “currency,” whatever the cost.

The yuan, the dollar, and the Ukraine war

Although the yuan's presence is negligible in the face of the dollar's takeover, this was a warning bell to Washington about Chinese plans. (Shutterstock)

But things do not remain as they are, and a lot of water has flowed through the global economy since then. At the time when Russian tanks crossed into Ukraine, with the aim of turning back the clock and bringing Eastern Europe back into Russia’s fold since losing it after the end of the Cold War, the US dollar’s ​​cannons were roaring relentlessly, targeting the Russian economy with a torrent of sanctions with the aim of forcing Moscow to retreat. Despite the failure of US sanctions to stop Russian military action, and while the whole world was paying the price of that war, Washington benefited exclusively, despite its suffering from high inflation rates. In addition to arms sales, which rose due to the fighting (4), and its profits from the sale of oil and gas, the US dollar reached its highest level in 20 years, in contrast to the euro, which lost 6% of its value (5).

But the United States was watching with some concern and apprehension what happened to the Chinese yuan due to the direct consequences of that war, and at the end of 2022 the share of the Chinese currency in financing international trade more than doubled to 4.5% from 2%, which is the increase that China deducted from the share The dollar decreased to 84.3% (6). Although the presence of the yuan is negligible compared to the acquisition of the dollar, this was a warning bell to Washington about Chinese plans. Ironically, the US Federal Reserve raised interest rates repeatedly, in the same period in which the People's Bank of China lowered its benchmark key interest rate for loans twice, which means that the higher cost of financing in dollars made China's currency relatively more attractive for financing trade, because the yuan became cheaper and stronger.

The rise of the dollar was in the interest of the United States, but it harmed the entire world, and caused economic turmoil in rich and poor countries alike, because the acceleration of the dollar helps fuel severe inflation, and as the basic currency for global trade and transactions, any increase in it means a weakening of the currencies facing it, which It ultimately leads to higher prices and inflation (7). On the other hand, the wind was blowing as China wanted, with a number of countries dissatisfied with the increasing pressure on the dollar, and with the United States and its Western allies expanding to impose sanctions on Russia, including cutting off its access to the dollar-based global payments system known as “SWIFT” (abbreviated as “SWIFT”). swift), the Chinese yuan found its way to the rise, and Moscow used it as an alternative currency in its trade to mitigate the impact of sanctions, an experience that was observed by several other countries, and saw it as an opportunity to reduce their dependence on the dollar for political and economic reasons (8).

Why is the dollar shaking despite its strength?

The dollar’s ​​share of central banks’ foreign exchange reserves decreased, reaching 59% in 2022, a decrease of more than 70% in 1999, according to 2022 data. (Shutterstock)

Nearly two years after the Ukraine war, which does not yet carry within it any prospects for an immediate solution, one of the convictions that formed among many was the necessity of reducing dependence on the dollar and diversifying the financial infrastructure to protect the political and economic interests of developing countries. This conviction was reinforced by the fact that the wave of financial sanctions led by the United States against Moscow, which included freezing about half of Russia’s foreign currency reserves, reinforced fears that the United States could use its currency strength to target others in the same harsh manner that Russia faced (9).

Although the dominance of the dollar, which has ruled the financial world for decades, is unlikely to change in the near future, and it will remain the main currency for international trade and transactions, as well as monetary reserves, the dominance is about to not be what it was in the recent past. According to the International Monetary Fund, the dollar’s ​​share of central banks’ foreign exchange reserves decreased, reaching 59% in 2022, a decrease of more than 70% in 1999, according to 2022 data (10).

The Ukraine war has paved the way for several countries to reduce their increasing dependence on the dollar and resort to testing the Chinese yuan, part of China's attempt to internationalize its currency. The beginning was with the BRICS countries, where the Central Bank of Brazil (the largest economy in Latin America) began to support the issuance of the yuan as the second largest reserve currency in preparation for reducing the dollar (11). Bangladesh was in a dead end when it was unable to pay the costs of a nuclear station project for Russia, so it resorted to the yuan, and justified to the United States that its decision was motivated by national interest (12), and these are the same motives that prompted Argentina to pay the costs of its imports from China in the yuan instead of the dollar, as well as It decided to pay part of its debts to the International Monetary Fund, amounting to $2.7 billion, in Chinese currency (13), and Iran preceded all those countries years ago, when it took advantage of the yuan to escape from the grip of American sanctions.

The matter was not limited to those countries, but it reached the allies of the United States in the heart of Europe. The French President had previously issued a public call in space for the necessity of reducing dependence on the dollar (14). These statements were not just passing words, as France took actual steps, and concluded... The first trading of liquefied natural gas on the stock exchange was in the yuan, and then the surprise happened. Saudi Arabia expressed its openness to pricing part of its oil in the Chinese yuan, followed by the UAE, which had already priced part of its liquefied gas exports in the Chinese currency, at a time when Iraq adopted all its dealings with China in its currency instead. From the dollar.

Is China holding itself back?

China still has a long way to go until the yuan comes close to being as influential as the dollar. (Shutterstock)

But despite the successes achieved by China in terms of liberation from the dominance of the dollar, Beijing's march collides with several obstacles and realities on the ground. Unlike the dollar, which is available globally for investment and trade, the yuan faces a tight grip by the Chinese Communist Party, which imposes strict control on money coming to and from the country, which hinders the transformation of the Chinese currency into a global currency that central banks can hold. Although it has entered the elite club of reserve currencies of the International Monetary Fund, it still lacks the ability to be a major global currency, because the yuan is practically not free, and the laws of the Chinese market are not completely clear. For the yuan to achieve true global status, it must be freely available for cross-border investment. It is not just a means of payment to accommodate trade.

One of the reasons why the dominance of the dollar is so firmly established is its stability. In addition to the fact that you can buy and sell it at any time, it is largely governed by the market and not by government policies, which is the opposite of what China does in its domestic market, which is subject to strict control (15), as well as its currency, which is subject to all... A day for a reference rate set by the People's Bank of China. Despite the Chinese government's promises to refrain from intervention, the significant decline that the currency faced in 2023 leads investors to doubt that the bank will not intervene, and while the devaluation of the currency has helped exports and the Chinese economy, its continuation threatens its future by becoming a reserve currency for banks, unlike the dollar, which It continues to maintain its stable value (16).

China still has a long way to go until the yuan comes close to being as influential as the dollar. According to the International Monetary Fund, the yuan represents 2.69% of foreign currency reserves, while the dollar represents 59% of them. Speaking of the international payments system “SWIFT,” the yuan’s share reached 4.5%, while the dollar reached 83.7%. These numbers explain why China relies so Now on “SWIFT”, despite its establishment in 2015 of a parallel financial system, “CIPS”, with the aim of promoting the use of the yuan across borders, and building an interbank payments system that could be an alternative to “SWIFT” (17).

With many global dynamics shifting to serve Beijing's interests, China appears to have many internal obstacles to its ambitions, most notably extensive state interference in currency pricing. Also, allowing the yuan to rise and fall may lead to the collapse of the Chinese economy if it falls to the level of danger, which hinders the principle of having a currency that can flow freely, which is the basic requirement for a global reserve currency, and it is the difficult equation that the Chinese Communist Party seeks to find a solution to, without He is forced to give up his control.

China's moves to exclude the dollar are therefore taking a slow and effective path, but it collides with several facts. The most important of which is that Beijing faces several problems in establishing a large financial system, because it does not have sufficient liquidity, in addition to being subject to strict restrictions. Most importantly, the Chinese government bond market is not large enough, and its currency is not yet integrated with the rest of the world to the extent that it can... Replaces the US dollar. According to Foreign Policy magazine, after the global financial crisis of 2008-2009, China strived to internationalize its currency, but its efforts did not bear fruit. The magazine adds that the reason why the US Treasury bond market is an indispensable part of the global financial system is that the United States is willing to bear financial risks that no other country dares to undertake, and has proven over decades that it is capable of managing them safely (18).

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Sources

(1) US Urges China to Allow Bigger Market Role in Valuing Yuan

(2) The lessons for China from Japan's lost decade

(3) China's yuan joins elite club of IMF reserve currencies

(4) US Arms Sales Shoot up Nearly 50 Percent in 2022, Driven in Part by Ukraine

(5) US Arms Sales Shoot up Nearly 50 Percent in 2022, Driven in Part by Ukraine

(6) Renminbi's share of trade finance doubles since the start of the Ukraine war

(7) The Dollar Is Strong. That Is Good for the US but Bad for the World.

(8) War in Ukraine might give the Chinese yuan the boost it needs to become a major global currency

(9) Will Russia sanctions dethrone 'King Dollar'

(10) Dollar Dominance and the Rise of Nontraditional Reserve Currencies

(11) Yuan tops euro as Brazil's second currency in foreign reserves

(12) Bangladesh to pay off Russian nuclear plant loan in Chinese currency

(13) Argentina makes IMF payment as deal talks grind on

(14) Europe must resist pressure to become 'America's followers,' says Macron

(15) This Is How China Manages the Yuan

(16) China's yuan may slip further to aid economic recovery – analysts

(17) Yuan won't be FX reserve currency if no one buys China's bonds

(18) China Doesn't Want a US Debt Default

Source: Al Jazeera