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China's Digital Yuan Will Challenge The U.S. Regime

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EDITOR NOTE: Institutional inertia. On one hand, that describes the dollar’s continuing domination across the proverbial ports of world trade. Switching costs are a pain, so unless something prompts the switch--something disruptive enough to change the monetary world order--then inertia will generally reign. On the other hand, institutional inertia also describes the US government’s attitudes toward China’s digital yuan. Sure, the Fed talks up a good talk on taking the matter seriously, not having to be first, and progressing slowly but carefully. But this came as a shock to a nation that had assumed its long-term hegemony to remain as is. To China, monetary digitization came as one fluid component in a long-term strategy that began decades ago. China is engineering the changes to the monetary world order that the rest of the globe will have to adapt to. China holds the initiative. And while America’s resources are formidable, its global mindset and positioning seem woefully behind. It didn’t take long for the British Pound to lose ground from its position as the world’s reserve currency. That was nearly a century ago. These days, technology has infused the economic realm with a digital dose of Dromos (an ancient Greek term for “racetrack”). And with China’s DCEP (digital yuan) in play, the decline of the dollar can literally happen in billions of bits (or bytes) across the globe, but at light speed.

In his 2011 book On Russia, former US secretary of state Henry Kissinger used the ancient Chinese game of Weiqi, or Go, as it is also commonly known, as an extended metaphor to conceptualize and explain the decisions of the Chinese regime in both foreign and domestic policy. A game of strategic domination akin to chess, Go is won by building and maintaining key positions around the board, rather than by any strategy of outright attrition. Understood as one of the stones placed upon the board, the digital yuan joins the Belt and Road Initiative (BRI), the Regional Comprehensive Economic Partnership (RCEP), and militarization of the South China Sea as part of a strategy for squeezing US positions both internationally and domestically.

In the struggle to dominate the multidimensional board of geostrategy, space, cyberspace, air, land, and sea, the digital yuan poses a new and unique challenge to the US regime. Though there has long been speculation, even serious discussion, of the dollar being replaced or eventually displaced as the world reserve currency, it has remained the overwhelming currency of choice, due in part to institutional inertia but also because of the continued relative economic predominance maintained by the US. As Tim Morrison pointed out in Foreign Policy a little over a year ago, this “exorbitant privilege” entails many advantages for Washington. Chief among them is the US's ability to cheaply and immediately finance its own deficit spending, as well as disproportionate power in imposing economic sanctions.

Though the most recent burst of covid-19-related spending in the US has rekindled talk of the demise of the dollar, over 80 percent of all international settlement transactions continue to be conducted in dollars. As to how the full-scale launch of the digital yuan (DC/EP) may undermine this standing, it provides the Chinese regime two immediate advantages. The first is that in the age of ubiquitous mobile-phone service and devices, millions of rural Chinese will gain access to banking services previously unavailable, upping demand and circulation of the yuan and enhancing the integration of rural Chinese into the larger Chinese economy. Second, unlike cryptocurrencies like bitcoin, the digital yuan is controlled by the Chinese regime and will allow it a clear, real-time picture of the Chinese economy, providing greater ease for the regime to centrally manage and plan its fiscal and monetary policies. Combined with their investments and involvement in Africa and Central Asia via the BRI, it is not difficult to imagine such immediate access to China's legal tender. This is key, as no other digital currency is yet so recognized by any state, potentially sending demand for digital yuan soaring across Central Asia and Africa and increasing its use in settling international transactions.

Though it had reigned uncontested for a century, it took comparatively little time for the British pound to lose its place as the global reserve currency. In the age of acceleration, the dollar’s fall could be even more abrupt and the fall more precipitous. The Global Financial Crisis signaled the end of an economic order. The next iteration of that order has yet to be determined. Were the dollar ever unseated, it would drastically alter the ability of the US to maintain its present deficits, which show no sign of abating, and which are the foundation of the US fiscal-military state.

Though arguably still preponderant, Washington's relative economic and geopolitical power continues to decline compared to that of Beijing. The digital yuan is likely to continue this trend. Digitizing the dollar, as Morrison suggested in his Foreign Policy article, is an obvious and necessary countermove—from the US regime's perspective—to the arrival of the digital yuan.1 The Trump administration did nothing to that effect, however, and the Biden administration has articulated no clear vision of the future of cryptocurrency or a digital dollar in the US besides vague indications of coming regulations.  There's certainly nothing so sweeping as the digitization of the dollar. For now, this limits Washington's ability to compete with Beijing in terms of seizing the benefits of a regime-approved digital currency. 

Originally posted by Mises Institute

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