Recent discussions about de-dollarisation are less about the decline of the US dollar, but rather about the perceived rise of the Chinese yuan. In this article, I argue that fears of a more important renminbi drive the debate about a less potent US dollar, in particular given the emerging partnership between China and Russia.
The idea of de-dollarisation was powerfully rebutted by George Magnus in his FT article “Dollar 🙂.” To briefly summarise the main argument against the decline of the US dollar, data simply does not confirm the fears of Western observers that the US dollar is getting less and less important. The main driver of the recent fall in the IMF reported USD holdings of central banks was mainly due to valuation changes given US monetary policy. No major central bank made any significant changes to its US dollar reserves in recent times. And, for some emerging market central banks, their US dollar reserves still represent an insurance against capital flow volatility.
Also, other data – be it data from debt markets or FX turnover – does not support the idea of significant de-dollarisation. The US has deep and liquid capital markets, and Western institutions are well-developed. Given the above, what is the magnitude of de-dollarisation articles published in newspapers and other media about?
Since the geopolitical crisis in Ukraine – triggered by Russia -, many people fear system change in the BRICS countries, which would limit the ability of the West to constrain via, for instance, sanctions. Indeed, Russia shifted some of her trade away from the US dollar to the Chinese yuan. There are even experimental zones in China, which allow for a “freer” convertibility of the onshore yuan to the Russian rouble and vice versa.
The notion that the Chinese yuan could represent a competitor to the US dollar is a perception, which couldn’t be any further from reality. Closed capital accounts in China and still relatively restricted capital markets make this an illusion. It is also not difficult to predict the direction of capital flows if China would open her doors for real.
Hence, China’s currency does not represent a suitable alternative to the US dollar.
What should catch the eye of Western observers is the change in the structure in China’s payment system, which comes with the emergence of electronic currencies in China. Obviously, the same issues plague electronic currencies than do the yuan. However, China has kind of leapfrogged all major economies in this respect. Together with China’s Cross-Border Interbank Payment System, this will make the Chinese renminbi internationally more usable and enable China to bypass Western-dominated SWIFT system, alluring for countries such as Russia.
This does not change anything about the dominance of the US dollar in the international system. The Chinese yuan is unlikely to be viewed as the same insurance against capital market volatility as is the US dollar. Nevertheless, these are significant changes in the Chinese payment system structure, which should be observed closely.
This article gives the views of the author, and not the position of the China Foresight Forum, LSE IDEAS, nor The London School of Economics and Political Science.
The blog image, “U.S. one-hundred dollar bills and Chinese one-hundred yuan bankn“, is marked with Public Domain Mark 1.0.