The Chinese Yuan: From a Reserve Currency to a Global Currency
As the Chinese currency, the Yuan, grows in silence globally and investment continues to flow steadily, the U.S. dollar-dominated international monetary system is beginning to show signs of major downward trends.
Geopolitical analysts and global finance observers assess China's recent policymakers’ statement indicating their satisfaction with China’s Yuan rise to a two-and-a-half-year high. As the recovery of the world's largest economy accelerates, the People’s Bank of China (China’s Central Bank) gives the market more freedom to devalue the Yuan. I argue the value of the Yuan is very relevant given the fact it continues playing an important role on the global financial market while indirectly influencing the dominance of the U.S. dollar.
Why is this important, you may ask? The answer lies in understanding how the Yuan value increases while the U.S. dollar decreases. This outcome will have tremendous impact of not only purchasing power, but also the availability of less expensive Chinese commodities on the global market at lower prices.
Let us state the obvious: China has displaced the United States as the world’s largest economy measured in terms of the amount of goods and services a citizen can buy in his own country (purchasing power parity).
Contrary to what the media is reporting, the Yuan is one of the most traded currencies, and everything indicates that it will sooner or later become part of the exclusive group of the most important international heavy weight currencies.
Of note: The Yuan has gained about 6.6% against the U.S. Dollar since the beginning of 2020. This is largely explained by the U.S. dollar's nearly 6% depreciation against a basket of currencies.
Unsurprisingly, China, as of 2020, gained the status as the largest global economy to grow by 1.9%; an increase that, according to the International Monetary Fund (IMF), surpassed its [IMF] June forecast by 0.9 points higher.
Understanding these statistics provides a clear picture of why the global economy will need the Chinese market, whether we like or not. In support of my argument, according to data released by the State Administration of Foreign Exchange, China's international goods and services trade surplus reached 315.2 billion Yuan (about $48.2 billion) this past October. Similarly, China’s trade income was about 1.66 trillion Yuan ($254.2 billion), while expenditures amounted to 1.34 trillion Yuan ($204.2 billion),
I include these stats not to impress, but rather to put in perspective the need for the next U.S. administration to structure sound policies and effective strategies when it comes to dealing with China. Arguably, the U.S. Economic and Financial Sanctions Policy, which has plagued many countries during the four years of Donald Trump's tenure, has prompted Chinese, Russians, Turks, Iranians, Venezuelans, Indians and even Europeans to seek another alternative currency to trade. The Yuan is considered, as of now, the best alternative.
This comes on the heels of China’s recent test of its digital Yuan. The test consists of China's Central Bank (CBI) issuing 10 million Yuan ($1.5 million) in digital currencies to 500 randomly selected users, a move seen by other countries as China’s public test of the Yuan's digital payment system.
The issue is far bigger, I argue! What I mean is that the launching of the digital Yuan represents a direct threat to the dominance of the U.S. dollar. Could this explain why many central banks around the world are racing to issue their own digital currencies? Most likely! As a matter of fact, Japan's top finance diplomat, Kenji Okamura, argued that China seeks to gain the leadership advantage in its efforts to develop a digital currency. Interestingly, is not that exactly what Japan aimed at doing after the Plaza Accord saw a dramatic move in the Japanese Yen’s dollar exchange rate during 1980s of the last century?
Similarly, China’s introduction of the digital Yuan prompted seven major central banks, including the U.S. Federal Reserve, to engage in discussion about the next steps in the cryptocurrencies space. The talks aim at one thing and one thing only: To slow China’s progress toward financial dominance. This reminds me of Thucydides’ “Trap theory”. His theory suggests the dangerous dynamics that occur when a rising power threatens to displace a ruling power, like Athens, or Germany 100 years ago, or China today, and their impact on Sparta, or Great Britain, or the U.S. today.
It is my opinion that China’s digital Yuan will offer an alternative to the U.S. dollar, and when successfully adopted, it will help keep global financial markets away from the dollar-based system. It goes without saying that the digital Yuan provides China, and soon other countries, an opportunity to circumvent sanctions, and or any other restrictions the United States may impose.
As I argue in my forthcoming book, The Dynamics of Russia’s Geopolitics: Remaking the Global Order, the meteoric rise of China, the decline in the U.S.’s share of global power, the dissolution of a global order, and the possibility of joint military ties between Russia and China suggest that the shift in the global balance of power is already underway.
How Ironic: Only a decade ago the West stated that China’s economy would take many decades to catch up to that of the United States. The prediction was wrong! The trade war between the United States and China indicates the falsity of the USA’s preceding assessment. Welcome to reality!