In recent years, global financial media has been speculating on when the Chinese yuan will replace the US dollar as the world’s leading international currency, a status referred to as “global reserve” by bankers and currency traders.
The Chinese Communist regime has not been shy about its desire for this, at times even claiming it to be an inevitable trend. However, facing delicate trade negotiations with Washington, Beijing has downplayed this ambition. While they may downplay this ambition for the sake of negotiations, it is also clear that the replacement of the dollar by the yuan is far from inevitable, but rather has always been a far-fetched notion.
As an export-oriented economy, Chinese exports to the United States account for 3% of its Gross Domestic Product (GDP). The Chinese government realizes that China’s prosperity is more susceptible to the impact of US-China trade than that of the United States. According to reputable private analysts, about 16 million Chinese workers are involved in Sino-US trade. Given the significant stakes and economic concerns, China’s trade negotiators are not keen to declare victory on currency matters and risk antagonizing the United States.
More importantly, the Chinese Communist regime knows – or should know – how far the yuan is from attaining the status of global reserve currency. It is certain that the US economy and the US dollar no longer maintain the overwhelming advantage they once did. Clearly, this is a concern for every country on the planet.
Nevertheless, there are no other currencies with the necessary features to replace the dollar, and the yuan is no exception. The reason why the Chinese government is less eager to promote the yuan over the dollar is that they realize that only when the Chinese regime is willing to relax its strict control over finance and currency, can the yuan acquire the necessary characteristics to replace the dollar.
International practice is the first barrier for the yuan to replace the dollar. China has been striving to enhance the yuan’s status in the “China-centered system.” The Chinese government requires the majority of trade activities in its Belt and Road Initiative to use the yuan for trade and capital flows. China has also initiated the establishment of the Asian Infrastructure Investment Bank (AIIB), strictly handling loans and transfers based on the yuan. The Chinese government successfully compelled the International Monetary Fund to include the yuan in the currencies offered through Special Drawing Rights. Furthermore, the People’s Bank of China is promoting the digital yuan to facilitate the replacement of the dollar by the yuan.
However, despite investing so much effort and resources, it is indisputable that the dollar still holds the dominant position. About 80% of global trade is conducted in dollars, even if these trades may not involve Americans. The dollar is used in approximately 90% of currency transactions, while the yuan only accounts for 4% of such transactions, with the euro already at 30%. For instance, exchanging Egyptian pounds for yuan often involves the dollar. These robust relationships have developed over time and it will take a considerable amount of time for the yuan to establish favorable relationships for itself.
Liquidity is the second challenge the yuan faces. People can trade in dollars and dollar assets 24/7, 365 days a year. The dollar market is vast, well-developed, allowing for easy transfer of huge funds, with minimal impact on currency or financial asset prices. The dollar market also offers a wide variety of financial instruments, making it attractive to traders and their financial supporters, as they must hold balances in the dollar as the “global reserve” currency during business operations. These key players highly value these traits and know that a yuan-based market cannot compete with the dollar.
It is evident that even in the best-case scenario, for China to challenge the global status of the dollar, it will require a long period of effort and promotion. Moreover, it is not clear whether the Chinese government is willing to make the necessary sacrifices. For example, regulatory bodies would need to relinquish strict control over the yuan exchange rate to allow the yuan to float freely in the global currency market.
To provide the necessary liquidity and various investment instruments to exporters, importers, and their financial support institutions, the Chinese government must give up its current control on capital and investment flows in and out of China. While theoretically possible, such adjustments would contradict China’s adherence to control, making the yuan’s bid to challenge the dollar as the global reserve currency destined to fail.
Kindly note that this rewritten and translated version is purely based on the original article provided.