A debate surrounding de-dollarization has gained momentum, sparked by concerns over Washington's use of the US dollar as a geopolitical weapon. Amidst this backdrop, the Chinese yuan has emerged as a potential contender challenging the dominance of the US dollar as the global reserve currency. However, Beijing's stance on promoting the yuan as the reserve currency of choice remains cautious and is not without its challenges. This article examines the reasons why China may not be fully supportive of de-dollarization and explores the key obstacles it faces in making the yuan the world's top reserve currency.
1. Cautious Approach to Currency Liberalization:
China, while expressing a desire to disrupt US dominance, seeks to do so on its own terms. The People's Bank of China has treaded carefully in promoting the use of the yuan without jeopardizing financial security. This cautious approach involves maintaining capital controls to regulate the inflow and outflow of foreign money, influencing the exchange rate and ensuring stability. These controls are seen as essential for an independent monetary policy and financial security. As a result, Beijing is likely to focus on expanding the yuan's influence within its active trading partners, rather than pursuing complete de-dollarization.
2. Inability to Run a Persistent Deficit:
The US dollar's status as the reserve currency comes at the cost of a persistent current account deficit for the United States. The demand for dollars exceeds the American demand for imports, leading to an ever-increasing deficit. However, China, as the world's second-largest economy, cannot afford to sustain such a deficit like the US due to its own economic limitations and political unwillingness. Running a sustained current account deficit and providing sufficient supplies of yuan-denominated assets globally would require significant structural reforms that China is currently unable to undertake.
3. Geopolitical Risks and the Need for Alternative Assets:
Challenging the US dollar's dominance requires overcoming its outsized influence. Currently, even the euro has a larger role in the global reserve system compared to the yuan. The limited choices of reserve assets pose a challenge for China's central bank, as it would need to hold significant amounts of yuan-denominated bonds similar to the US Federal Reserve's holdings of Treasury securities. Additionally, geopolitical risks associated with the global financial system and the inertia within it further complicate China's path towards yuan internationalization. While the yuan's adoption for trade and reserve holdings may grow, it is unlikely to dethrone the dollar as the world's preferred reserve currency.
Final Thought:
Although the Chinese yuan has gained prominence as a potential challenger to the US dollar's dominance, Beijing's cautious approach and the inherent challenges it faces indicate a lack of full support for de-dollarization. China's reluctance to fully liberalize its currency, the inability to run a persistent deficit like the US, and the hurdles posed by the existing financial system limit the yuan's chances of becoming the top reserve currency. While the yuan's influence may expand regionally and among its active trading partners, a complete shift away from the US dollar is unlikely in the near future. The dynamics of the global financial landscape and China's own economic and geopolitical constraints shape the realities of the yuan's quest for reserve currency status.
