China’s Yuan Faces Uphill Battle Against the US Dollar

Despite the slow and steady de-dollarization of the world economy, the Chinese yuan has little to no chance of unseating the US dollar. In a note published on Wednesday, Skylar Montgomery of Global Data TS Lombard explained why it makes sense for China to seek to use the yuan, or at the very least a group of other currencies, to challenge the dominance of the dollar.

According to Montgomery, “the dollar’s reserve status is a privilege that gives the US significant political, economic, and market influence,” and he added that although America benefits from its reserve status, other nations suffer as a result.

She stated that emerging markets are particularly hurt by a strong dollar. Since most commerce with developing markets is conducted in dollars, any increase in the value of the dollar results in greater import costs for other nations.

Additionally, a strong US dollar makes it easier for the US government to use it as a political tool, as was the case when the West decided to freeze Russia’s foreign exchange reserves after Moscow invaded Ukraine.

Breaking Dollar Dependency

Russia, China, and the other BRICS countries have competed for an alternative to the dollar, in part because of the weaponization of the currency, according to Montgomery. De-dollarization is still taking place, although it is progressing extremely slowly.

Montgomery emphasized that the dollar’s proportion of global currency reserves, which fell from 72% in 2000 to 59% presently, is the most obvious indicator of de-dollarization.

The euro, British pound, Canadian dollar, Chinese yuan, and Australian dollar have all gained pretty equally from the 13% decrease, she pointed out. “Also, a decline of less than 1% annually is very slow-moving, and the dollar still makes up the majority of currency reserves,” the report continued.

There is no substitute, which is one of the main reasons why the US dollar will maintain its dominance and not be supplanted by the yuan. Based on data on currency reserves, no one currency has clearly emerged as a viable alternative to the US dollar. The reserve proportion of the euro is 19.7%, compared to the yuan’s 2.6%.

The note also warns against expecting China’s yuan to take up a sizable chunk of the world’s currency reserves. Due to its closed capital account, uncertain government interference, difficulty or unwillingness to run a current account deficit, and regulated currency, the [yuan] has seen little foreign usage, according to Montgomery.

There are several challenges for a BRICS-wide currency to compete with the dollar’s hegemony.

Source: Business Insider