Will the Yuan Replace the Dollar?

A bank teller counts the stack of Chinese yuan and U.S. dollars at a bank in Shanghai, China, on July 22, 2005. STR/AFP/Getty Images

Commentary

With the International Monetary Fund (IMF) now allowing countries to pay dollar-denominated debt in the Chinese yuan, what does that mean for the U.S. dollar?

It’s no secret that both the Chinese and the Russians and many other countries want to downgrade the dollar’s influence and even de-dollarize global trade. That’s certainly happening, and in more ways than many realize.

In fact, despite what some economists and other experts might assert to the contrary, the end of the dollar’s reign in world trade and finance is in sight.

Those who say otherwise insist that Chinese currency markets are neither big enough nor possess the liquidity levels and lack the capital market openness needed to replace the U.S. dollar in the global financial system—they have a point. On that score, they’re correct.

De-dollarization Is Underway at the IMF, OPEC, Elsewhere

Nonetheless, the dollar is being replaced in financial transactions around the world in both big and small ways.

Recently, the IMF allowed Argentina to pay off more than $1 billion in debt in yuan instead of dollars. That’s a big deal, given that the IMF is an American creation, based in dollars, and plays a major role in international lending to nations. That certainly doesn’t add support for the dollar.

But that’s not all.

The Oil Producing and Exporting Cartel (OPEC) led by Saudi Arabia now accepts yuan as payment. For the first time ever, the big story is not about the petrodollar but the petroyuan. Since the 1970s, much of the global demand for dollars has been driven by countries’ need for dollars to buy oil from OPEC in the global market.

The OPEC logo pictured ahead of an informal meeting between members of the Organization of the Petroleum Exporting Countries (OPEC) in Algiers, Algeria, on Sept. 28, 2016. Ramzi Boudina/Reuters

Following U.S.-led sanctions over the Ukraine war, Russia vastly increased its use of the yuan, boosting the Chinese currency and the already bourgeoning Sino-Russian trade. Russia adopted China’s CIPS (Cross-Border Interbank Payment System) for trading oil, bypassing the dollar-based SWIFT financial system.

What’s more, over the past decade, China’s made bilateral currency agreements with dozens of countries, if not more, which cuts the dollar out of bilateral transactions.

Going further back, since the end of World War II, there has been a great demand for dollars in order for countries to purchase most other goods and services in the global market as well. Even today, about 60 percent of global reserves and trade are in dollars.

But now that countries can use the yuan to buy oil, the dollar has competition in the world’s largest market, which is a very significant development; other markets will soon follow.

Plus, the U.S. dollar is inflationary to other countries. The yuan isn’t—at least not yet—and is well on its way to becoming more attractive and in demand than the dollar.

In a strategic context—in addition to bilateral currency deals, expanded trade in oil and grain with Russia, Saudi Arabia, Iran, India, and others—China also controls most of the sea gates that are critical for overseas trade. Furthermore, its navy is numerically larger than ours and growing, adding a military/strategic dimension to China’s play to elevate the yuan at the dollar’s expense.

It’s Not Just the Dollar That Will Be Replaced

It’s true that China lacks capital markets, liquidity, and capital freedoms necessary for a reserve currency, at least as we view it. The global financial system depends on open capital markets, the free flow of capital, and massive levels of liquidity that only the United States can provide.

But some observers are mistakenly assuming that even if the yuan somehow could replace the dollar, the international financial system would remain pretty much the same.

That’s just not realistic. It’s now how China sees it, either.

Does anyone really believe that communist China wants to become like the United States in terms of our openness, liberality, and democratic values that go along with the current trading system?

The answer is “it doesn’t.”

Why Would Beijing Want to Adopt the Western Liberal Trade Model?

The truth is that China wants to replace the entire international financial system that the United States created and managed for the past 75 years with its own system.

The Gwadar Port in Pakistan—a multi-billion dollar infrastructure project that China has invested in as part of its Belt and Road Initiative. Beijing also has ambitions to extend the initiative to the Arctic, opening up shipping routes that would form a “Polar Silk Road.” Amelie Herenstein/AFP/Getty Images

Yes, China operates in it today and benefits from it. But tomorrow?

The Chinese Communist Party (CCP) doesn’t want an open system, can’t create one, or much less control it without shattering its already brittle authoritarian social structure and economy.

Hence, its capital controls, the tech-driven surveillance state, slave labor camps, organ harvesting, torture, the takeover of ports and infrastructure from its Belt and Road “partners,” and all the other evil things it does. Ultimately, the CCP is threatened by the current system’s liberality, openness, and market competition.

A China-Centric New World Order

That’s why it’s critical to understand that the CCP can only exist if it remains in total control.

Beijing wants to replace the Western, liberal world order with a more restrictive trade model based more on a quid pro quo relationship, underpinned by coercion, intimidation, and threat rather than managed or liberal market structures.

That means the Sinification of international institutions. The Belt and Road Initiative (BRI) (147 countries) is part of the plan, with China at the center. It is indeed noteworthy that neither the United States nor the U.S. dollar plays any role in this massive expansionary economic project run by Beijing.

In fact, the BRI is a good indicator of what the preferred Chinese trade model would look like. It’s not a new model or particularly beneficial to Beijing’s partners. In fact, it’s rather old and not too dissimilar to the former Soviet Union. That system, such as it was, lasted for 70 years or so. Today, even with its collapsing economy, the Chinese are in a much better position financially, technologically, diplomatically, and militarily than Russia ever was, even at its apex of power in the USSR.

Finally, the introduction of a BRICS currency, of which China will be a part, will occur as soon as next month and will directly challenge the dollar in a much greater level of international transactions. It may even have a gold valuation dimension to it.

Just as ominous, the BRICS members are Brazil, Russia, India, China, and South Africa. As you read this, the group is looking to add at least five new nations to its membership.

Again, China is playing a central leadership role, with the United States and the dollar deliberately excluded.

The bottom line should be clear: communist China wants to replace American hegemony, not copy it.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.