China’s Yuan: The Uphill Battle to Dethrone the Dollar
By the Digital Zeitgeist, Geopolitical and Financial Analyst based in the UK
Introduction
In the complex world of global finance, the hegemony of the US dollar has been unchallenged for decades. However, in recent years, China has embarked on a bold mission to elevate the yuan’s international status. This effort, often dubbed ‘de-dollarisation,’ seeks to enhance the yuan’s role in global trade and finance. Despite these ambitions, China confronts significant hurdles that complicate its path to success.
The Five Major Obstacles
- Limited Availability of Yuan Outside China
A crucial challenge in the global proliferation of the yuan lies in its limited availability outside China. This scarcity is largely due to China’s stringent capital controls, restricting offshore access to its currency. The Banque de France highlighted this issue in a 2022 working paper, emphasising the impact of these policies on yuan liquidity. As of the second quarter of 2023, the yuan constituted a mere 2.45% of foreign central bank reserves, dwarfed by the dollar’s 59% share.
- Dollar’s Dominance in Cross-border Transactions
The dollar continues to dominate cross-border transactions. In August 2023, the yuan accounted for only 3.47% of SWIFT transactions, a stark contrast to the dollar’s commanding 48%. Remarkably, nearly half of China’s own cross-border payments were still dollar-denominated, despite only 17% of its exports going to the US. This reality underscores the entrenched position of the dollar in global trade.
- China’s Economic Challenges and Capital Controls
China’s economic fragility, compounded by its strict capital controls, poses another significant barrier to the yuan’s internationalisation. Economic challenges, such as slowing growth and rising debt levels, have raised concerns among global investors about the stability of the Chinese economy. This has led to a reluctance to hold or transact in the yuan. Additionally, China’s capital controls, designed to stabilise its financial system and prevent capital flight, have the unintended consequence of limiting the yuan’s accessibility and attractiveness to foreign investors.
- Trust and Transparency Issues
Trust and transparency are fundamental to a currency’s international appeal. China’s less transparent financial system and the perceived opaqueness of its regulatory environment have led to trust issues among international investors. This skepticism is exacerbated by concerns over the independence of its monetary policy from political influence. These factors diminish the yuan’s attractiveness as a reserve currency, as central banks and investors typically prefer currencies from more open and predictable economic systems.
- The Inertia of the Existing Dollar System
Finally, the entrenched nature of the dollar-based system presents a formidable challenge. The dollar is deeply integrated into the global financial system, underpinning everything from commodity pricing to international debt markets. This integration creates a ‘network effect,’ where the value of using the dollar increases as more entities use it. Unseating such an entrenched currency requires not just making the yuan more attractive but also overcoming the inertia of the existing system, a daunting task that involves altering long-established financial habits and infrastructure.
Conclusion
China’s ambition to elevate the yuan to a status comparable to the dollar involves overcoming a complex web of challenges. From limited offshore availability and economic fragility to trust issues and the inertia of the established dollar system, the path to internationalising the yuan is fraught with obstacles. While progress has been made, the journey to dethrone the dollar is an uphill battle, requiring not only internal reforms in China but also a shift in global financial paradigms.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of GPM-Invest or any other organisations mentioned. The information provided is based on contemporary sourced digital content and does not constitute financial or investment advice. Readers are encouraged to conduct further research and analysis before making any investment decisions.