The dollar displaced the British Pound as the world’s leading reserve currency at the beginning of the last century. After the Bretton Woods Agreement in 1944 which linked world currencies to the greenback, it has been reigning supreme. Click here
As China opened up and became integrated with the world trading and financial systems, it has been caught in a "Dollar Trap", having to convert excess national savings into secure, internationally-convertible US treasuries.
Despite the global financial crisis of 2008-09, dollar hegemony was strengthened, rather than weakened, argued Eswar Prasad, Chair Professor in International Economics and Senior Fellow at the Brookings Institution. Click here
Over the years, the United States has been enjoying the dollar’s “exorbitant privilege” of almost unlimited money-printing (“quantitative easing” in central bank parlance). As Richard Nixen’s Treasury Secretary John Connally famously said in 1971, “The dollar is our currency, but it’s your problem.” Click here
Arvind Subramanian, Senior Fellow at the Washington D.C. -based Peterson Institute for International Economics, pointed out in 2011 that the world is living in the shadow of China’s economic dominance. More national currencies were moving in tandem with the renminbi (the Chinese yuan) instead of the dollar. Click here
Nevertheless, the still-mighty dollar is now increasingly weaponized to impose economic sanctions on China.
Niall Ferguson, Senior Fellow at the Hoover Institution, opined in 2019 that the explosive growth of Alipay and Tencent online-payment platforms represented a real threat to dollar’s hegemony. Click here
Owing to America’s dwindling domestic savings and a gaping current account deficit, Stephen Roach recently warned in the Financial Times that the dollar’s “exorbitant privilege” is about to end.
Now China is actively pursuing the issue of a national digital currency. Click here Unlike a speculative cryptocurrency, the digital renminbi is China’s sovereign currency fully backed by the state. It's a natural development as China has become by far the world leader in digital payment systems, accounting for 44% of the global volume.
Driven by latest blockchain technology, China's digital currency doesn't require a bank account. This has huge poverty-relief potential for the massive "unbanked" poor across the globe.
As Chinese banking authorities have full control, the digital currency would help combat illicit financial transactions. The financial data would facilitate the formulation and execution of monetary policies.
As its transactions are instant and transnational, the digital currency would be attractive for international trade settlements with China, including projects in the "Digital Silk Road" of the Belt and Road Initiative.
Admittedly, the latter has been facing increasing headwinds from host countries, such as debt unsustainability, ecological neglect, non-transparency, and corruption. But China’s authorities are learning fast. Working more closely with international organizations like the World Bank and broader stakeholders in host countries and elsewhere, China is making significant headway with Belt and Road projects, doubters and the pandemic notwithstanding. Click here
What is more, the digital currency doesn't depend on the US-controlled SWIFT (Society for Worldwide Interbank Financial Telecommunication) banking system. It is thus immune from dollar-based US sanctions. Click here
According to a July 2019 McKinsey Report China has become more self-sufficient while the rest of the world, particularly Asia and resource-rich countries across the globe, have grown more dependent on China for parts, components, materials, trade and investments. This supply-chain connectivity is not easy to shift, anti-China decoupling notwithstanding. Click here
While the United States and Western allies are not about to warm to China's digital currency anytime soon, more and more countries in Asia, Africa and Latin America, by definition, most of the world's population, are likely to embrace the convenience and opportunities of China's digital payment systems, made even easier and safer by its sovereign digital currency.
This trend is likely to accelerate with the commencement of the Regional Comprehensive Economic Partnership (RCEP), comprising a third of the world’s population, a third of world GDP, and half of the world’s manufacturing.
The developing world accounted for 49% of world GDP in 2010, and is expected to reach 60% by 2030. Click here China's growing global integration augurs well for widespread acceptance of its sovereign digital currency, speeding up the internationalization of the renminbi.
China’s digital sovereign currency would also help drive China's "dual circulation economy" - accelerating both domestic consumption as well as international trade and investments. The strategy is expected to be formalized in China's upcoming new Five Year Plan (2021-25).
With the Covid-19 pandemic under much better control compared with other nations, China’s economy is now surging ahead, including exports, investments and domestic consumption. Click here As Alibaba’s “Singles Day” e-shopping bonanza successes show, digital payments will continue to transform retail sectors both in China and worldwide. Click here
Additionally, China’s outbound tourism has occupied the world’s top spot since 2013. Barring the pandemic, it is estimated to be worth $365 billion by 2025. Click here Even with a trade war, Chinese outbound tourists are expected to make 160 million trips a year. Click here The digital sovereign currency is therefore well-timed.
In October the dollar lost its top position as the world’s most used payment currency, falling behind the Euro since August 2013, thanks to erosion of perceived value of the dollar, emergence of more attractive Euro and Renminbi-denominated assets, and aversion to greenback-based sanctions. Click here With worsening United States geopolitics, China is likely to park more of its hard-earned savings in other assets, including its own bonds and some of the more viable Belt and Road projects.
Thanks to vastly different performance over the pandemic, China’s economy is now expected to overtake the United States’ five years earlier, by 2028, according to UK’s Centre for Economics and Business Research. Click here
All these developments by no means dethrone the dollar all at once. No other sovereign currency, let alone the renminbi, can remotely compare with the greenback’s global financial width and depth. Even falling by 10% over the past two decades, the dollar still accounts for 62% of global currency reserves.
However, as the Chinese saying goes, nature moistens everything on the quiet 潤物細無聲. China’s digital sovereign currency is now poised to mitigate the dollar trap, accelerate internationalization of the renminbi and offer an escape route from dollar-based sanctions.
