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King Dollar still looks safe from the Yuan

2 years ago
in Business, Economy, Features, highlights, Home, home-news, latest News, Markets
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King Dollar still looks safe from the Yuan

The dollar’s dominance isn’t going away anytime soon. While the Chinese yuan could grow in importance, it’s also very unlikely to replace the greenback as the global reserve currency—barring some truly radical changes to China’s economic model.

Predictions of the demise of King Dollar resurface from time to time—often in the wake of sanctions like the ones currently punishing Russia’s economy. But so far the dollar’s role as the global trade and reserve currency still looks quite secure. The share of U.S. dollars in foreign-exchange reserves of global central banks has slipped in recent years, but it still accounts for nearly 60% of the total, more than all other currencies combined, according to the International Monetary Fund.

And the dollar’s supremacy in global trade has also remained solid. About half of global trade is invoiced in dollars, far above the U.S. share in international trade itself, according to the Bank for International Settlements.

The greenback is used to settle trades that don’t involve U.S. companies, and those non-U.S. companies also use the currency for funding. Around half of cross-border loans and international debt securities in the offshore markets are denominated in the U.S. dollar. The greenback was on one side of 88% of all foreign-currency trades, according to a survey by the BIS last year. America’s deep and well-regulated capital markets encourage companies outside the country to invest as well as raise money there.

Still, with the U.S. weaponizing the dollar’s dominance, other countries, especially those facing U.S. sanctions, will try to find alternatives. China’s yuan, the currency of an ascendant superpower, is one candidate. But last year, the yuan only accounted for 2.7% of global foreign-currency reserves.

One obvious but essential barrier to the yuan’s wider use is that the country still has strict capital controls. That limits how much foreign companies are willing to invest and borrow in yuan, outside of for use in direct trade with China. Given its size in global trade, China may be able to settle more of its trades with other countries in yuan, but the recipients also need to invest their own yuan somewhere safe—and readily available, without conditions.

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China’s still-developing capital markets and strict rules on direct, onshore portfolio investments by foreigners are significant problems. China’s offshore yuan market is also small compared with those for the currencies of many developed countries. And a more widely used Chinese yuan for investment purposes could also entail other enormous changes for China—a lower domestic savings rate and more expensive currency probably among them. A change in that direction would pose a direct challenge to the nation’s current growth model, which still depends substantially on exports and artificially cheap capital for state-owned enterprises at home.

King Dollar still looks quite safe on his throne, at least for now.

 

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