Will China’s new digital yuan threaten the reign of the King Dollar?

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China is the first major economy to issue a blockchain-enabled digital version of its currency, the yuan, and this development has some in Washington concerned that the status of the US dollar as a global reserve currency is under threat. “Anything that threatens the dollar is a national security problem. This threatens the dollar in the long run, “the Atlantic Council’s Josh Lipsky told the Wall Street Journal, in an article describing the digital yuan as” a reinvention of money that could shake a pillar of American power. ”

China certainly has reason to be irritated with a global economic order in which almost 90% of foreign exchange transactions involve dollars and where more than 60% of all global central bank reserves are held in dollar-denominated assets, when the government The US has become increasingly leveraged. this reality in order to sanction countries and companies that it considers to be acting against its national interest. Read more: Why the next recession might force the Federal Reserve to trade greenbacks for digital dollars Diana Choyleva, chief economist at China-focused Enodo Economics, argued in a note to clients Monday that recent events, including Leaks by National Security Agency contractor Edward Snowden, that the US government monitors transactions on the Society for Global Interbank Financial Telecommunications Network, has served as a “wake-up call” for Chinese policy makers. “The Chinese Communist Party, obsessed with control and very reluctant to any foreign interference in its internal affairs, realized that it depended on a global payments system that could be exploited by American intelligence agencies and that Washington could use to deny Chinese banks access to dollar financing, ”he wrote. However, while China has a geopolitical incentive to unseat the dollar as the world’s reserve currency, it’s not clear that a digital yuan supports that goal, according to Eswar Prasad, a former head of the China division of the International Monetary Fund and an economics professor at the International Monetary Fund. Cornell University. . “Most cross-border payments, whether for trade or finance, are already digital, so it’s hard to imagine a digital yuan having a huge impact on international payments,” he said. A more important development, he argued, was the introduction in 2015 of China’s Cross-Border Interbank Payment System, a rival to SWIFT. That system, in combination with a digital yuan, would make it easier for countries facing US sanctions, including Russia, Iran and Venezuela, to be paid in yuan for oil or other exports. See also: Bitcoin enthusiasts, liberal lawmakers applaud a Fed-backed digital dollar But Prasad said there is little chance that a digital yuan would threaten the US dollar’s role as a global reserve currency, which depends on the unrivaled size and liquidity of the US debt markets, the flexibility of the dollar exchange rate, laws that allow capital to freely enter and leave the country, and an institutional framework of checks and balances, an independent judiciary and central bank. While China has made progress in developing its financial markets, allowing the value of its currency to be set by market forces and allowing capital to flow more freely, there is little reason to expect that it will quickly adopt the type of Western institutions that seek global investors. as an environment to protect your savings, he said. Indeed, even the share of China’s own trade in goods settled in renminbi, as the yuan is also known, remains well below its peak in 2015, before the government cracked down on capital flight abroad, and shake hands with international investors that for China, financial liberalization is not a one-way street.

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National politics, rather than geopolitics, is the real motivation for launching the digital yuan, according to Stephanie Segal, senior researcher at the Center for Strategic and International Studies. “A lot of financial activity in China is happening through platforms like AliPay and WeChat Pay, and the central bank and other regulators did not have much visibility of that activity and that is something that the Chinese authorities do not like,” he said. . Meanwhile, China’s economy relies heavily on the patience of state banks, which roll over delinquent loans to avoid disruption from bankrupt financial institutions. “That can be maintained as long as you have a constant source of funding,” in the form of consumer deposits, but a growing private money system could undermine that, Segal said. In fact, the main reason many governments, including the US, are experimenting with central bank digital currency is for the convenience of their citizens and to improve the effectiveness of macroeconomic policy. During negotiations on the coronavirus stimulus measures, liberal lawmakers pushed for legislation to include the creation of a Federal Reserve-backed digital dollar that Americans could hold in individual accounts with the central bank. The move would have made it easier for the federal government to issue stimulus money to individuals, especially the millions of Americans who have no connection with private banks. The Federal Reserve is currently studying the idea of ​​a digital dollar, but President Jerome Powell has said it won’t budge without first gaining the support of a large majority of the American public and Congress. In March, Powell said that “because we are the world’s leading reserve currency, we don’t need to rush this project, we don’t need to be the first to market.”