EDITOR NOTE: For reasons of efficiency, stability, regulation, and overall global confidence, the US dollar has enjoyed “exorbitant” privilege in being the world’s reserve currency. But in 2011, analysts began noticing that capital flows began moving away from the dollar and into Chinese renminbi. Despite enjoying the largest economy in the world, there’s no doubt that the US is operating under a very big shadow, namely, China’s economy, which is on the verge of dwarfing it as early as 2028. And with the digital renminbi in play, China’s currency will likely provide the world, including its emerging nations, a method of “secure” and convenient payment with which the US dollar cannot compete. The clock marking the dollar’s last days as the world’s monetary hegemon is ticking. And the only way to keep your dollar-based wealth from dwindling is to back it up, as the dollar once did, with gold.
The US dollar displaced the British pound as the world’s leading reserve currency at the beginning of the last century. Since the Bretton Woods Agreement in 1944 linked world currencies to the dollar, it has reigned supreme.
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.
Over the years, the US has enjoyed the dollar’s exorbitant privilege of almost unlimited money-printing, or “quantitative easing” in central bank parlance. As former US president Richard Nixon’s Treasury secretary John Connally famously said, “The dollar is our currency, but it’s your problem.”
Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, pointed out in 2011 that the world was living in the shadow of China’s economic dominance. More national currencies were moving in tandem with the renminbi instead of the dollar. Nevertheless, the dollar is being increasingly weaponised to impose economic sanctions on China.
However, owing to America’s dwindling domestic savings and a gaping current account deficit, Stephen Roach has warned that the dollar’s “exorbitant privilege” is about to end.
Now China is pursuing a national digital currency. 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.
Driven by latest blockchain technology, China’s digital currency does not require a bank account. This has huge poverty-relief potential for the unbanked poor across the globe.
As Chinese banking authorities have full control, the digital currency will help combat illicit financial transactions. The financial data will 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.
The latter faces increasing headwinds from host countries, such as debt unsustainability, ecological neglect, non-transparency and corruption. China’s authorities are learning fast, though. Working more closely with international organisations such as the World Bank and broader stakeholders in host countries and elsewhere, China is making significant headway with
belt and road projects.
What is more, the digital currency does not depend on the US-controlled Society for Worldwide Interbank Financial Telecommunication (Swift) banking system. It is thus immune to dollar-based US sanctions.
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 investment. This supply-chain connectivity is not easy to shift, efforts at decoupling notwithstanding.
While the United States and Western allies are not about to warm to China’s digital currency any time soon, more countries in Asia, Africa and Latin America 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, comprising a third of the world’s population and a third of world GDP.
The developing world accounted for 49 per cent of world GDP in 2010 and is expected to reach 60 per cent by 2030. Thus China’s growing global integration augurs well for the widespread acceptance of its sovereign digital currency, which would speed up the internationalisation of the renminbi.
China’s digital sovereign currency will also help drive China’s “dual circulation” economy, accelerating both domestic consumption and international trade and investment.
With the Covid-19 pandemic under better control in China compared with other nations, China’s economy is surging ahead, including in exports, investment and domestic consumption. As China’s “Singles’ Day” e-shopping bonanza successes show, digital payments will continue to transform retail sectors in China and worldwide.
Additionally, China’s outbound tourism has occupied the world’s top spot since 2013. 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 for the first time since 2013, thanks to the erosion of the dollar’s perceived value, emergence of more attractive euro and renminbi-denominated assets and aversion to US sanctions. With worsening US geopolitics, China is likely to park more of its savings in other assets, including its own bonds and some of the more viable belt and road projects.
Thanks to their vastly different performances during the pandemic, China’s economy is expected to overtake the United States’ five years earlier, by 2028, according to Britain’s Centre for Economics and Business Research.
All these developments will by no means dethrone the dollar all at once. No other sovereign currency, let alone the renminbi, can remotely compare with its global financial width and depth. Even falling by 10 per cent during the past two decades, the dollar still accounts for 62 per cent of global currency reserves.
However, China’s digital sovereign currency is now poised to mitigate the dollar trap, accelerate internationalisation of the renminbi and offer an escape route from dollar-based sanctions.
Originally posted on SCMP