From Greenback to Redback? Can China's Yuan Really Take It To The Dollar?
The recent BRICS Summit illustrated to many we are firmly in multipolarity, but that doesn't mean a sudden dramatic, seismic shift in the global financial system.
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Amidst the chaos of Ukraine War the U.S. dollar's dominance has, at least to those who like to claim it is, facing a serious challenge - the BRICS and an alternative currency.
As BRICS met in South Africa - the agenda glistened with discussions on de-dollarization, idea of a common currency and expansion.
I touched upon some of these developments during my own musings in a recent video.
It's not just talk; across Southeast Asia, Africa, and the Middle East, a growing confidence to reduce usage of the greenback is brewing.
Indeed, this wasn’t just the original BRICS-5 (Brazil, Russia, India, China, South Africa), but an expanded BRICS-11.
(There will be more on that in a follow up article soon…stay tuned)!
Yet, while others emphasise the relevance of BRICS collectively, others posit a more specific challenger for global currency dominance.
China’s Yuan.
But does the Yuan (or Renminbi) have what it takes? Would there ever be a place where markets, countries, people really flocked to it in serious numbers?
While you read my brief musings, then follow it up with an in-depth discussion l had with Michael Kao on the channel.
To unlock this saga, let's go back to the basics.
A true global currency has three jobs:
settling trades,facilitating payments,
and being a reliable reserve asset.
The dollar, over the years, has aced these roles, especially its standout job as a reserve asset.
In fact, according to the IMF, at the end of 2022, the dollar still held 58.36% of the world's foreign exchange reserves.
(The euro, yen, and pound followed, but other than the euro ~20%, there were no contenders and haven’t been since WWII.)
When it comes to global trade, a whopping 88% happened in good old U.S. dollars.
But let's not forget history.
The dollar didn't rise to power solely through its financial prowess.
It had muscle backing it up - both economically and militarily. Initiatives like the ‘petrodollar’, where oil deals are sealed with dollars, firmly sealed the deal.
However, pure proportions isn’t everything. So is its usage in policies and as part of economic statecraft - often not very constructively.
The dollar's been accused of being weaponized to achieve political goals, which has eroded trust.
Indeed, while it is now at 58%, it was at 70% only 20 years ago.
Recent events, like the U.S. imposing sanctions on Russia and domestic polarization, exacerbated by rises in populism, have laid bare its vulnerabilities.
Now, let's talk motivation.
The quest to de-dollarize isn't new; it's been on an increasing set of country agendas since the '60s.
Can we guess which ones were at the forefront of that? Most self-interested in pushing any possibilities of that?
The 2007-08 financial crisis for many is one of the most significant inflection points, worsened by the rise of populism over the 2010s, the Euro Crisis, Trump 2016, COVID-19, and then Ukraine War.
(Of course there are more, but l am listing just some that come to mind).
There are two main camps in the de-dollarization game.
First, the challengers, arguably led by Russia and China, who aim to knock the dollar off its throne and shake up the global financial system.
Then, those who seek economic independence without completely ditching the dollar, mostly among the Global South.
Indeed, it was one of the largest talking points of Putin during his addresses at the BRICS Summit. No-one was talking up de-dollarization more than him.
Given the isolation Russia has experienced since Feb 24, 2022 with sanctions, capital flight etc, it has drastically increased how it trades in Yuan to circumnavigate them.
So, on that let's shift the spotlight to China's Yuan.
It's been working hard to climb the currency ladder, so to speak - with it now being the world's fifth-largest payment currency while also growing in the foreign exchange transaction charts.
Moreover, China's been spreading this work further, by setting up clearing banks and commodity exchanges, all doing business in Yuan, showing its commitment to making the yuan a global player.
But it's not all smooth sailing.
It's got several limitations, like convertibility issues and capital flow controls, holding it back from full-blown international stardom. Plus, its dance with the dollar as a global reserve asset isn't exactly easy to simply untangle.
That’s why the idea of ‘decoupling’ has been falling out of favour increasingly for something like ‘derisking’.
Remember that trip by Macron in April - its these relating to these he and Ursula von de Leyen were exploring during their trip to China.
Watch this to know more on that.
The future?
Well, not much overnight. Or over-decade. Or over a just really bloody long time.
While the Yuan could have potential, it faces roadblocks to any global currency status. Most notably, China’s intensifying domestic issues
namely a housing crisis,
systemic demographic risks, a
nd continued strategic with the US, who while not facing its own challenges, has through decisions like restricting semiconductor access with allies like Japan and the Netherlands.
Plus, emerging tech like blockchain and digital currencies might spice things up, but revolutionising the global financial system isn’t exactly something done over a bank holiday.
I’m not a finance guy, but even l can see the dollar's not going anywhere.
But equally, its being more challenged than at any time l can see in recent memory.
Coupled with more countries diversifying their reserve assets away from the dollar, the Yuan is primed to potentially play a bigger role.
Though much of this being based on speculation and hope from many, not driven by data, research or empirical evidence, but disgruntled feelings and sense of historical injustice.
While the pace of any upsurping of the dollar by yuan will be decided by tangibel metrics and data points surrounding China's economic performance and its willingness to embrace reform.
So, stay tuned – the global currency game is heating up, and the Yuan is trying to make moves.