Challenges to the US Dollar hegemony and
emergence of Yuan in the current multipolar
world
Nimisha Soni
Pranav Jain
Abstract
This research paper showcases how the world order has changed over the years. It tracks the
journey of various currencies’ rise to the top and then their eventual downfall. This research
focuses on the potential decline of the US dollar as the global reserve currency as a result of
macro- and microeconomic trends, as well as China's long-term plans to become a major global
player. Our theories and presumptions have been supported by qualitative research. Our
conclusions are supported by certain quantitative data, including total assets, total exports,
inflation using the CPI Index, and the deficit to GDP ratio, as well as a number of studies,
articles, and government data.
Introduction
Order is a governing system for people dealing with each other. There are internal orders for
governing within the countries, typically laid out in constitutions and there is a world order for
governing between countries, typically laid out in treaties. Internal orders change at different
times within the countries by civil war and the world order which changes between countries,
due to international war. They happen when revolutionary new forces defeat weak world order.
There are three main conditions which are noticed, one, countries don’t have enough money to
pay off their debts even after lowering their interest rates so their central banks began printing
a lot of money and the money printed is more debt that the government takes. Second, large
internal conflicts occur as income and value disparities widen. This manifested itself in political
populism and polarisation between the left, which seeks to redistribute wealth, and the right,
which seeks to defend those who own riches. Third, increasing external conflict between the
rising great power and leading great power which is now happening with China and USA. So
we take a look back in history and see if the same conditions have had happened many times
before which nearly always led to changing the domestic and world orders.
Literature Review
The factors which might lead to the end of mighty US dominance and emergence of a fastgrowing Chinese Economy has been well documented in both theoretical and empirical
literature.
A variety of slow-moving factors influence the currency composition of reserves (Morrison,
2019). However, such massive and abrupt transformations are not unique in history. The
persistent economic expansion and rapid integration of Emerging Markets and Developing
Economies, particularly China, have resulted in less concentrated global output and trade
growth, shifting the world's economic centre of gravity gradually. Going forward, China is
predicted to replace the United States as the world's largest economy by 2030, with EMDEs
accounting for more than half of global GDP by then (“Reserve Currencies in an Evolving
International Monetary System,” n.d.).
Chinese growth is dependent on FDI and exports. With its cheap labour and regulatory reforms
implemented by the government over the last two decades, China has emerged as a worldwide
hub for industrial operations. As a result of the massive influx of FDI, China was able to create
infrastructure and become the world's largest manufacturer of numerous durable products
(Paul, 2016).
Li, Farmanesh, Kirikkaleli, & Itani in their paper on “A comparative analysis of COVID-19
and global financial crises: evidence from US economy” aimed to investigate the influence of
the global financial crisis and the COVID-19 epidemic on US macroeconomic indicators.
According to the findings, the present COVID-19 epidemic is more severe in terms of
economic activity than the global financial crisis. Furthermore, the current pandemic's impact
on recession odds are lesser than it was during the global financial crisis (Li, Farmanesh,
Kirikkaleli, & Itani, 2021b).
(Keddad & Sato, 2022) in their paper on “The influence of the renminbi and its macroeconomic
determinants: A new Chinese monetary order in Asia?” reports the efforts to promote
international uses of the renminbi, as well as trade dependence on and export similarity to
China are important factors in synchronising Asian currencies to the renminbi, and when Asian
countries loosen their peg to the USD, the correlation of their currency with the renminbi tends
to increase.
The rising value and importance of Yuan also carries some implications for the other
economies. “China’s Currency: A Summary of the Economic Issues” briefs the economic
issues faced by the USA’s economy due to Chinese economic policies of currency devaluation
Morrison (W.M. & Labonte, M.. 2011).
People’s Bank of China has been actively signing Bilateral Swap Agreements with foreign
central banks since 2008. McDowell, 2019 in his paper on “The (Ineffective) Financial
Statecraft of China’s Bilateral Swap Agreements)” categorizes the reasons for which China
might deploy BSAs for into two types – Defensive and Offensive. On the defensive side, it
mentions settling trades in RMB, while on the offensive side, it mentions using them as a shortterm liquidity backstop (McDowell, 2019).
Research Methodology
To understand the cyclical nature of the world currencies, secondary data was collected from
government records, research papers, articles, various academic videos. This data was used to
analyse and compare the patterns and trends which have been seen during the rise and fall of
each currency. Four currencies, namely: The Dutch Guilder, British Pound, US Dollar and
Chines Yuan have been talked about in this paper since the analysis can be carried out onlky
the modern currency as we now know it.
Historical Cycles of Reserve Currency
Background
The transition from Guilder to Pound or the better known when British Pound paved the way
for US Dollar were marked by many similarities. In both the cases the following things took
place: Debt crisis and debt restructuring, internal conflicts arising majorly due to the wealth
gaps, external war, currency breakdown and establishment of a new world order. Their was
one significant difference as well, the guilder did not survive, but the British pound did.
The Rise and Fall of Dutch Guilder
Dutch with their highly innovative ships and capitalism which fuelled these endeavours
managed to extend their empire around much of the world. This naturally resulted in their
currency being widely accepted. The Dutch Guilder became the first “World Reserve
Currency” other than gold and silver.
Dutch became the dominant force by overthrowing the Spanish and went on to become the
world’s richest empire from 1625 till their collapse in 1780. Globalization was on a rise during
this period. Every country aspired to travel far and wide to gather riches from across the world.
During this period, Dutch with their great shipbuilding capabilities and their well-established
economic system were way ahead of others in building their empire.
The two core characteristics of the Dutch’s rise to power was their innovations and capitalism.
The Dutch were highly educated so much as so at their peak, they were responsible for about
25% of all the major inventions in the world. Also, the Dutch practically invented capitalism.
The concept of public debt and equity markets was introduced for the first time. First publicly
listed company and the first stock exchange were created which led to the establishment of a
well-developed lending system in which debt could easily be created. The market innovations
and well-oiled systems of the Dutch attracted investors which led Amsterdam to become the
leading financial centre of the world.
But as it is with history, what goes up, comes down as well. Other countries grew in power as
well during this time of prosperity. The Dutch empire became more costly to maintain. The
profits dwindled and many more challenges emerged. The Dutch and British clashed numerous
times over economic issues. The Dutch became more indebted. As it has been with the case
with capitalism, as the wealth gap increased, and internal conflicts between various
states/provinces, rich and poor increased. The military was weak and divided and not strong
enough to protect the nation. Finally the Fourth Anglo-Dutch War (1780-1784) put the final
nail in the coffin. The Dutch guilder of the now bankrupted Dutch collapsed, paving the way
for a new currency to occupy the leading position in the world.
The Rise and Fall of British Pound
The Congress of Vienna concluded with the British Pound emerging as the world’s dominant
currency. This extended period of over 100 years was marked by increased integration,
development, and competitiveness. Trade flourished, Great Britain’s military and economic
powers were at peak and no nation wanted to challenge them and overturn the world order. The
British East India company became extremely powerful and made the British very rich and
powerful. Innovation and Capitalism marked this period as well.
The British used a capitalist system to incentivise and fund individuals to work together, and
they paired commercial operations with military strength to capitalise on global opportunities
and become enormously wealthy and powerful. The British East India Company reached the
peak of its powers and became the most dominant company in the world with its own military
and economy parallel to a sovereign nation. This period also saw two industrial revolutions
which leveraged modern technologies and machines to maximise the output and raise people’s
standard of living. Soon London also replaced Amsterdam as the world’s new financial centre.
However, as Britain's technologies and skills advanced and affluence grew, large wealth
disparities emerged. Great Britain grew more luxurious, although its relative dominance
reduced and it began to borrow excessively. Other countries, such as the United States, took
advantage of the expanding prosperity and grew more competitive. The British Empire quickly
grew more expensive to maintain and consequently less profitable. US got stronger
economically and militarily. The rising wealth gaps led to conflicts about how the wealth
should be divided within countries. Conflicts among the European nations to reinforce their
military and economic standing in the world soon followed. All this eventually led to a war.
The War which lasted for around 4 years, killed millions of people, displaced a lot more,
concluded with a new world order where British Pound was no more the reserve currency of
the world.
Research Objectives
1. To study the rise and steady decline of the dominance of the US Dollar.
2. To evaluate China’s strategy to establish Chinese Yuan as the reserve currency of the
world.
Research Objective 1
American Currency through the years
The historical progression of the dollar from being unimportant to the longest-used reserve
currency in the world is seen in the table below. Beginning with the American Revolution, it
has gone through numerous cycles where defaults causes a recession, devaluation of dollar,
falling of interest rates, increasing credit flow (raising debt), leading to inflation, and finally
the Fed raises interest rates to combat the inflation.
American
Revolution
War of independence of America with Great Britain. Seed of
change in the world order sowed. Special emphasis on raising
education, technology, competitiveness, innovation levels.
Began in Second
1870
American
Revolution
Scientific advancement, standardisation, industrialisation and
mass production led to an increase in trade. Financial strength
of USA increased with an expansion in global economic
output. Rise in prominence of the USD.
1920
Mass production ensured that the economic growth boomed.
Real worker pay increased, prices rose as new consumer
products entered the market. Modern industries were
established which further strengthened the economy. USA
emerged victorious in World War I.
1775-83
Known as the
roaring 20’s
1929
1930
1932
Fed tightened the monetary policy to control speculation which
Tighten of
monetary policy was created due to debt and pledges to deliver paper money
convertible to gold in the Roaring 20s. This caused the bubble
to burst. Stock markets came crashing down. Global
Depression soon followed.
A reduction in global lending was seen as a result of the SmootThe Great
Hawley Tariff Act and significant debt issues in the US. The
Depression,
incomes decreased, so did the demand for goods and services.
Smooth –
This resulted in a decline of US imports, an increase in credit
Howley Tariff
issues, and a self-reinforcing downward spiral of the economy.
Act
Tariffs were raised in an effort to protect jobs, causing a global
economic downturn.
A number of large government spending programmes for
Franklin D.
employment programmes, unemployment insurance, social
Roosevelt first
security benefits, etc., paid by large tax increases, and large
100 days
budget deficits financed by Federal Reserve monetized debt
enacted by President Roosevelt.
1933
Emergency
Banking Act
Bill passed to take steps and stabilize and restore confidence in
US banking system during the great depression..
1934
Gold Reserve
Act
1935
Tax bill
Exchange of US Dollars for gold stopped. Ownership of all
monetary gold and gold certificates transferred to the US
Treasury. Treasury prohibited from redeeming dollars for
gold. Dollar devalued relative to other currencies.
“Soak the Rich Tax”. The top marginal income tax rate for
individuals rose to 75% (from as low as 25% in 1930).
1937-38
Recession
Tightening of the monetary policy was a disastrous setback to
the recovery from the Great Depression.
1944
Bretton Woods
Agreement
US Dollar positioned to become the world’s leading currency.
USA managed to accumulate a lot of money and gold reserves
by the end of the world wars primarily on account of its arms
deals. This established the prowess of US both economically
and militarily. Gold now served as the basis for US Dollar and
other currencies were pegged to the US Dollar.
1945
End of World
War II, Petro
Dollar Deal
Saudi Arabia agreed for USD to be the primary currency for
oil deals. In the following years, to finance its activities, the
US government spent more than the tax revenue it collected,
leading to additional dollar-dominated debt.
1964
US started
running deficits
The Great Society program under Lyndon B. Johnson was a
set of domestic policy initiatives, programs and legislation and
was also spending increasing amounts on the fighting of
Vietnam War.
1971
Bretton Woods
system broke
down
Claims on gold became far more than the actual gold available.
More paper dollars were being printed than the gold baking
them. Countries rushed to claim their share before the gold ran
out. Bretton Woods system collapsed when President Nixon
called for an emergency suspension of the gold convertibility
to defend the dollars against the speculators.
1971 - 81
Fiat currency,
Oil embargo,
Inflation
1982 - 89
Debt
Restructuring
process
Dot com bubble
The official devaluation of the U.S. dollar against gold
increased the price of gold from $35 per ounce to $42.23 per
ounce and decoupled the dollar and other currencies from gold.
As a result, there was no monetary constraint, which led to
credit expansion, inflation, and a rise in oil and commodity
prices. This caused an exodus from bonds and other debt
assets, which drove up interest rates, and a rush into hard assets
such as real estate, gold, and collectibles. The Americans
adopted the mentality of borrowing money to immediately
purchase goods and beat inflation. This panic over dollar debt
led to an increase in interest rates.
The Brady Bond agreement caused stock market and economy
to boom that was accompanied by falling inflation and interest
rates in the US.
The bubble which was formed due to the huge inflow of capital
into the internet based businesses in the late 1990s burst.
Nasdaq experienced a 77% decline, wiping off billions of
dollars, forcing several online companies into bankruptcy and
severe recession followed soon.
2000
2008
Was triggered by a long term debt cycle which in turn was
Mortgage
Backed Security triggered by a build-up of printed money. Printing of more
money caused the prices of financial assets to increase.
financial crisis
Borrowing money was almost free so an increase in the amount
of money in the economy saw a rise in stock values and
corporate profits. Wealth and income disparity expanded.
Interest rates declined until they reached 0%. Huge bailout
programmes had to be implemented to pull the country out of
crisis.
Prior to 2008, whenever the Federal Reserve desired to boost the economy from recession, it
would employ one of three monetary policies. 1) interest-rate-driven monetary policy, in which
interest rates are lowered to stimulate credit growth; 2) printing of money, buying financial
assets and 3) Coordination between fiscal policy and monetary policy in which the central
government engages in substantial debt-financed spending and the central bank subsequently
purchases this debt. This long-term debt cycle leads to the accumulation of printed money,
which then results in the formation of a bubble. This bubble bursts, and in order for the
economy to recover, relief measures and bailout programmes are implemented, resuming the
same cycle of printed money accumulation. Due to the unequal distribution of this wealth, the
disparity between wealth and income widened. As shown in the diagram below, the United
States has previously reached the printing money and credit cycle, including during the
financial crises of 1933, 2000, and 2008.
Rise and Decline of the US Dollars
However, now the objective is to understand how the pandemic of 2020 is distinct and may
result in a shift in the world's reserve currency. The United States has the ability to print the
world's reserve currency, which is the greatest economic power a country can possess, if it
loses its reserve currency status, it will become vulnerable.
2020 Bubble Burst and Decline of the US Dollars
Rise of internal conflict
People pay attention to the fact that they get the money and not from where they get it, hence
this motivates the elected officials to make promises to voters and spend borrowed money on
what these votes desire, this debt and non-debt liability causes problems later on. The wealth
gap between haves (capitalists and businessmen) and have-nots (socialists) expanded in 2016,
with the election of Donald Trump, a capitalist populist who vowed to help people with
conservative beliefs who had lost their jobs and were struggling. He went on to reduce
corporate taxes and run large budget deficits, which the Fed accommodated. This was
beneficial to stocks, financial markets, businesses, and the investors who held them.
As a result of the coronavirus pandemic and the isolation it forced, incomes, employment, and
economic activity plummeted in March 2020, and the US central government took on a lot of
debt to give people and businesses a lot of money, and the Federal Reserve printed a lot of
money and bought a lot of debt to pull the country out of the COVID-induced recession. US
emergency interest rate reduction brought the rate to zero percent, the same level as during the
2008 global financial crisis.
In 2017, according to the Federal Open Market Committee (FOMC), the Fed will begin
reducing its Treasury holdings. However, it repurchased Treasury's shares within a few years.
In an effort to stimulate the economy and support financial markets during the pandemic, the
Federal Reserve announced on March 15, 2020 that it would purchase $500 billion in U.S.
Treasury’s and $200 billion in mortgage-backed securities over the next few months. On March
23, 2020, the FOMC expanded quantitative easing purchases to an unlimited amount. In April
2022, its balance sheet peaked at $8.96 trillion. The Fed announced in March 2022 that it would
begin reversing these purchases to remove funds from the economy and combat inflation.
Graph 2: Amount of US Debt
Amount of US Debt
Debt held by the public
Intragovernmental holdings
Source: Author
Graph 3: Total assets of US
Total Assets of US
10000000
8000000
6000000
4000000
2000000
Source: Author
Graph 4: Deficit-to-GDP Ratio
Deficit-to-GDP Ratio
30,00%
25,00%
20,00%
15,00%
10,00%
5,00%
-5,00%
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
2017
2021
0,00%
-10,00%
Source: Author
12.18.21
12.18.20
12.18.19
12.18.18
12.18.17
12.18.16
12.18.15
12.18.14
12.18.13
12.18.12
12.18.11
12.18.10
12.18.09
12.18.08
12.18.07
12.18.06
12.18.05
12.18.04
12.18.03
12.18.02
0
The deficit and national debt are intrinsically linked. When the United States government
spends more than it receives in tax revenues, it has a budget deficit, which must be covered by
borrowing more money, thereby increasing the national debt. Thus, the United States
experienced massive debt creation and debt monetisation, which made people wealthy but
devalued money.
When the economy recovers after a recession and is expanding, inflation often increases. This
means that prices rise, giving consumers less power and incentive to spend their money.
Unemployment often drops during these times. That's because the demand for products and
services rises, leading businesses to increase their output and are generally in need of more
workers.
Both PCE and CPI are used to track changes in prices and consumer spending, however PCE
often exhibits lower inflation rates than CPI. The PCE index represents the price change in
products and services consumed by all households as well as non-profit institutions that provide
services to households, whereas the CPI shows the change in urban families' out-of-pocket
spending. Since a 6.9% gain in January 1982, the personal consumption expenditures price
index increased 6.8% over the course of one month in June. Core PCE, which excludes food
and energy, rose 4.8% from a year ago, an increase of 0.1% from May. In addition, according
to the BEA report, personal consumption expenditures, a measure of consumer spending, rose
1.1% for the month, exceeding the 0.9% projection and primarily reflecting the sharp increase
in prices. Consumers merely kept up with inflation, as real spending climbed by 0.1% after
accounting for inflation. Personal income increased by 0.6%, exceeding the forecast of 0.5%,
although disposable income decreased by 0.3% when adjusted for inflation. The consumer
price index increased 9.1% from a year earlier, the highest increase since November 1981,
according to figures released earlier this month.
Graph 5: U.S. Inflation using CPI Index
U.S. Inflation using CPI Index
14,00
12,00
10,00
8,00
6,00
4,00
2,00
0,00
1995
-2,00
2000
2005
2010
Inflation
2015
2020
2025
amount
Source: Author
According to the Currency Composition of Official Foreign Exchange Reserves (COFER)
survey conducted by the International Monetary Fund, the share of US dollar reserves held by
central banks decreased to 59%, the lowest level in 25 years. This partially reflects, according
to some analysts, the declining role of the U.S. dollar in the global economy as a result of
competition from other currencies used by central banks in international transactions. If central
bank reserves fluctuate significantly enough, currency and bond markets may be affected.
A new national survey by CNBCI reveals that two-thirds of workers believe their pay is not
keeping up with rising prices due to escalating internal conflict, an increase in interest rates to
combat inflation, and a decline in dollar reserves. According to the survey, middle-income
Americans are under the most pressure, and the percentage of workers contemplating quitting
is at a four-year high. If foreign investors sell the bonds they hold, it will increase the cost of
borrowing for all U.S. companies and depress the economy.
Thus, we can conclude that in 2016, the difference between the socialists and capitalist began
to widen. In 2020, the coronavirus pandemic caused the US economy to fall leading to a
recession. Fed used the technique of quantitative easing to increase the money supply among
people. This increase in money supply by printing of money means that the US government is
increasing its debt, devaluing its dollars and at the same time this increase supply of money in
the economy has led to inflation in the 2022. By raising interest rates and making borrowing
more expensive while wages are not rising at the same rate as inflation, the Fed is attempting
to contain this inflation. The US always drives itself into such bubbles and creates inflation,
which it then pushes out onto other nations since it has the ability to print the world's reserve
currency, as the countries are now beginning to realise. This objective allows us to draw the
conclusion that the dominance of US dollar over the world has weakened considerably and it
is now at a serious risk of defaulting on its debts.
Research Objective 2
Adjusted for purchasing power, China is now the world’s largest economy. It is also one of the
fastest growing economies in the world.
Table 2: Growth rate of various countries
Country
Nominal GDP
(in trillions)
PPP Adjusted
GDP
(in
trillions)
Annual
Growth (%)
United States
$23.0
$23.0
5.70%
China
Japan
Germany
$17.7
$4.9
$4.2
$27.3
$5.4
$4.8
8.10%
1.60%
2.90%
United Kingdom
$3.2
$3.3
7.40%
India
France
Italy
Canada
$3.2
$2.9
$2.1
$2.0
$10.2
$3.4
$2.7
$2.0
8.90%
7.00%
6.60%
4.60%
South Korea
$1.8
$2.4
4.00%
Source: World Bank
China is also world’s largest importing and exporting more than United States and the
European Union.
Graph 6: Comparative exports of China and US
Exports (in billions of US $)
3000
2500
2000
1500
1000
500
Chinese Exports
01.01.2018
01.01.2015
01.01.2012
01.01.2009
01.01.2006
01.01.2003
01.01.2000
01.01.1997
01.01.1994
01.01.1991
01.01.1988
01.01.1985
01.01.1982
01.01.1979
01.01.1976
01.01.1973
01.01.1970
0
USA'S Exports
Source: Author
Background
China's economy was in a completely different place just 40 years ago, contributing less than
1% to world exports and still in the early phases of development.
Timeline of Rise to Power
Comparing mid-20th century China to the country now reveals significant differences. Prior to
the 1980s, China was experiencing a period of extreme poverty, and civil unrest Mao Zedong's
rule.
The 1970s
In the late 1970s, China's share of global exports was less than 1%. There were few trading
centres and little industry in the country. For instance, Shenzhen, which is currently the world's
hub for technology, manufacturing, research, etc., and has one of the busiest ports in the world,
had only approximately 30,000 residents in 1979.
The 1980s
Numerous areas, including the Pearl River Delta, were classified as Special Economic Zones
in the 1980s. Tax incentives provided by these SEZs were effective at luring outside
investment.
In addition, the Coastal Development Strategy was put into effect in 1989 to leverage key
coastal areas as engines of economic growth.
The 1990s and onwards
By the 1990s, global value chains and transnational production networks were on the increase,
with China serving as a low-cost manufacturing hub because of its affordable labour.
The Western Development Strategy, often known as the "Open Up the West" programme, was
put into effect in 1999 to close out the decade of the 1990s. In order to keep talent in China's
economy and draw more international investment, this programme attempted to improve
infrastructure and education.
China finally became a member of the World Trade Organization in 2001, which allowed it to
advance apace.
China has established itself as a global leader in manufacturing, producing everything from
everyday home items to essential components for the production of automobiles. Some the
most common products manufactured in China are:
- Precision instruments
- Semiconductors
- Industrial machinery for computers and smartphones
An Economic Superpower
China's trade recovery from the crisis has outperformed that of the majority of other nations in
2021; in Q1 2021, exports increased by about 50% compared to the same period the year before,
totalling about $710 billion.
And there are no immediate signs of a slowdown in the nation. The country is actively pursuing
further economic development goals, such as Made in China 2025, with the aim of dominating
the world's high-tech manufacturing. Additionally, the country is a founding member of the
RCEP, which will soon be the largest trading bloc in the world, and the well-known One Belt,
One Road initiative has been funding infrastructure projects internationally for the past ten
years.
China has the world's largest nominal GDP in terms of purchasing power parity and the secondlargest nominal GDP in terms of current currency (PPP). China may be on track to surpass the
United States as the largest economy in the world by nominal GDP in the upcoming years with
annual growth that consistently exceeds that of the United States.
Over the previous four decades, China's economy has slowly expanded, resulting in significant
improvements in economic development and living conditions. As the government gradually
phased out collectivised agriculture and industries, offered more freedom for market prices,
and increased firm autonomy, both domestic and international trade and investment have
increased.
China has emerged as the world's top exporter thanks to a combination of industrial policies
that favour local production. Despite these advantages, China has several challenges, such as a
rapidly ageing population and a significant environmental decline.
China’s strategies to meet its goals
Trade
The best way for China to push its currency on the world stage is via trade.
When two foreign governments conduct trade, they must decide whether to settle the trade in
the currency of the exporting or importing country, or in a third-party currency such as the US
dollar. In small-time trades, the importer usually pays the exporter in their home currency. Ex.
If an Indian company imported electrical equipment from a German company, the Indian
company would have to pay the German company in Euros because tiny businesses like these
are usually only set up to accept payments in their own currency. Larger operations can go
either way, and the settlement currency is typically something agreed upon in purchase
agreement contracts. On the worldwide scale of commodity transactions, it is preferable to
employ a reliable third party, such as the USD. Being the biggest manufacturer, importer and
exporter, China is virtually providing goods to the whole world and therefore has a huge
leverage. Low income and lower middle-income countries can easily be pressurised to make
payments in Yuan. By lowering transaction costs and processing times, the China International
Payments System (CIPS) reduced one of the most significant barriers to internationalising the
yuan and increasing its global adoption.
Belt and Road Initiative
Introduced in 2013 by President Xi Jingping, the Belt and Road Initiative is a large collection
of infrastructure and investment programmes that would run from East Asia to Europe,
dramatically expanding China's economic and political clout.
From 2013 to December 2021, China's participation in the BRI through building contracts
(typically financed through Chinese financial institutions) and investments totalled over USD
890 billion in Belt and Road Initiative countries (BRI).
According to government data, 146 countries and 32 international organisations signed
cooperation agreements for the BRI in March 2022. To "join" the BRI, governments and
organisations must sign a Memorandum of Understanding between China and the respective
country or organisation (MoU). A number of nations are identified in official Chinese media
(yidaiyilu.gov.cn) as having not signed a formal MoU for cooperation under the Belt and Road
Initiative framework. Russia, Austria, the Democratic Republic of the Congo, Dominica, Niger,
and Benin are among them.
Table 3: Number of countries for belt road initiative
Sub Saharan Africa
43
Europe and Central Asia
35
East Asia and Pacific
25
Latin America and Caribbean
20
Middle East and North Africa
18
South Asia
6
Source: Author
Table 4: Number of countries in various Income Group
High Income
34
Upper Middle Income
42
Lower Middle Income
41
Low Income
30
Source: Author
A large portion of this development is financed by loans from Chinese state banks. These loans
are in Chinese RMB and must be returned in Chinese RMB. If sovereign nations owe money
in a currency other than their own, they are practically required to keep some of that currency
in reserve or risk defaulting on their loans. And trading with China is the best way to increase
these reserves.
Example –
Chinese exports to Pakistan totalled $24.23 billion, a 57.8% rise year on year, while imports
from Pakistan totalled $3.59 billion, a 68.9% increase year on year.
Similarly, China's commerce with African countries has increased 20-fold over the last 20
years, positioning China as one of Africa's largest bilateral economic partners. To decrease the
trade imbalance, China has vowed to import $300 billion in African goods by 2025.
Oil Market
China is doing as it approaches oil negotiations. Beijing is actively negotiating with Saudi
Arabia, the world's largest oil exporter, to price some of its oil supplies to China in Yuan. The
US dollar is sometimes known as the Petrodollar. The reason for this is because the great
majority of global oil transactions are handled in US dollars, and the Saudis have only traded
oil in US dollars since 1974, when they made a deal with the Nixon administration that
provided the country with security guarantees. Since all the countries require oil, they must
keep a USD reserve in order to purchase it. The Saudis are angered by the US' lack of support
for their involvement in Yemen's civil war, as well as the Biden administration's efforts to strike
a compromise with Iran over its nuclear programme. China's courtship of Saudi Arabia has
intensified. China has recently helped Saudi Arabia develop its own ballistic missiles, advised
the country on a nuclear programme, and begun investing in Crown Prince Mohammed bin
Salman's pet projects, such as Neom, a futuristic new metropolis.
Whereas the United States purchased 2 million barrels of Saudi crude per day in the 1990s, it
imported less than 500,000 barrels per day in December 2021, China has increased its oil
imports during the last three decades to keep pace with its developing economy. In 2021, Saudi
Arabia was China's main crude supplier.
Russia – Ukraine War crisis
China has undoubtedly absorbed the adage "never waste a good crisis." The BRICS members
met to examine their ongoing trade relations, primarily in light of Western sanctions imposed
on Russia. These are the five largest emerging and highly powerful economies, and China's
commerce with the other four increased rapidly in the first half of 2022, with an annual increase
of 14.1 percent, which was 4.7 percentage points faster than China's total growth rate in the
same period.
The Russia-Ukraine conflict has effectively devolved into a banking war between Euro-centric
Western financial institutions and Russia. The other BRICS countries have not joined the
economic sanctions against Russia.
Currently, 11 Russian banks, including Russian Standard, MTS Bank, Gazprombank, and
RSHB, officially offer credit cards that may transact on China's UnionPay worldwide credit
card network, the world's second largest, while numerous additional banks are undergoing
UnionPay approval procedures. This erodes Western dominance of the world's central banking
system even further.
According to the World Gold Council, the BRICS nations had a cumulative gold stockpile of
5,259 tonnes as of the end of 2021, compared to the United States' 8,133 tonnes. However, as
a result of the federal government's reckless spending since 2020, the national debt in the
United States has risen to little more than 133% of GDP. This ratio is just about 70% for the
BRICS countries.
As Russian banks connect their financial systems with non-Western and non-Eurocentric
banking systems, other BRICS countries may follow. If this occurs, the BRICS countries might
re-monetize gold for trade in goods, establishing a new gold standard based on the Chinese
Yuan.
Russia and China declared their relationship, a limitless bilateral relationship. In May, China's
total imports from Russia increased by 80% year on year to $10.3 billion.
Beijing's purchases of Russian liquefied natural gas increased by 54% year on year to 397,000
tonnes. It also imported 8.42 million tonnes of oil from Russia in May, a 55% increase over the
previous year.
China inked an agreement with Russia's energy behemoth Gazprom to begin paying for gas
shipments to China in Yuan and roubles rather than US dollars.
In order to continue getting Russian gas, Russian President Vladimir Putin also required
European customers to open rouble bank accounts with Gazprombank and pay in Russian
currency. This was done to lessen Russia's dependency on hard currencies such as the US
dollar, euro, and others.
Western sanctions, particularly those targeting Russian dollar assets, have made a few
governments throughout the world nervous about how much security they can obtain from their
reserves. If the US government can choose to cut off the reserves of a foreign country that they
believe is not following their regulations, there is nothing to suggest it won't happen to them.
For economies that are politically and culturally close to America, such as Canada, Australia,
and most of Western Europe, this is probably not a big deal because they are extremely unlikely
to be sanctioned by the US, but for countries that don't have such strong ties, these sanctions
should serve as a wake-up call to say that it's probably worth diversifying emergency reserves
to include some currencies that cannot be cut off by the west.
As far as American-approved risk hedges go, the Chinese Yuan is about as good as it gets; it's
a currency that can be used to make direct purchases from the world's largest exporting nation,
and the Ukrainian invasion has demonstrated that the Chinese government is willing to do
business with economies that the West has shunned.
Bilateral Currency Swap Agreement
In a bilateral swap line (BSL), two central banks agree to buy each other's currency in exchange
for their own, either up to a predetermined maximum or indefinitely.
China entered into bilateral currency swap agreements worth more than RMB 3.5 trillion ($554
billion) with more than 40 countries globally between 2009 and 2020. The goal of these
agreements, despite the fact that they can be used to meet RMB (or other local currency)
liquidity needs, has been to gradually reduce reliance on the USD in bilateral transactions, both
for political reasons and to prevent the volatility of the dollar value of local currencies as a
result of changes in US Fed monetary policy.
A system of BSLs China has developed relationships with many nations, including 400 billion
yuan with South Korea and Hong Kong, respectively. 350 billion Yuan with Singapore, 350
billion Yuan with the Bank of England, 350 billion Yuan with the European Central Bank.
A system of BSLs South Korea (RMB 180 billion or $29 billion), Singapore (RMB 150 billion
or $24 billion), Indonesia (RMB 100 billion or $16 billion), Malaysia (RMB 80 billion or $13
billion), and Thailand (RMB 70 billion or $11 billion) are some of the Asian nations that China
has developed with.
Promoting local currency settlement (LCS) agreements in each of these nations' bilateral trade
with China is the main objective here.
With an extra 10% projected for 2022, Indonesia states that LCS decreased its USD exposure
by $2.53 billion in 2021.
Russia has also settled a greater proportion of its rising bilateral commerce with China in RMB,
increasing from 3.1% in 2014 to 17.5% in 2020. This is projected to rise further as a result of
Russia's RMB 150 billion ($24 billion) bilateral swap line with the PBOC and China's Crossborder Interbank Payment System (CIPS).
Furthermore, because China is the world's largest manufacturer, accounting for about 20% of
global manufacturing, they may use this to pressure corporations to pay in Yuan rather than
US dollars.
China is well on its way to achieve wide acceptance and wide circulation by putting the
Renminbi in the everybody’s hands. 85% of central banks around the world are increasingly
willing to hold Chinese Yuan as a reserve currency. Thus, it is making inroads as a worldwide
reserve currency. China’s growing economic and political power and its increasing control over
the world trade threatens to reduce the USD’s dominance. It remains to be seen how people
will react to the collapse of the existing currency and establishment of a new one.
Conclusion
We conclude that the Renminbi, the currency of China, is well on course to replace the Dollar
in the long term, and China might assume control of the global economic engine. Three
important topics covered in our paper are, 1. What caused the US dollar to become so valuable
around the world? 2. Is the US dollar deteriorating? 3. Whether the Chinese currency will
surpass the US dollar. We comprehended the framework of the previous international order's
growth and fall, with a focus on the British and Dutch currencies and realised that the same
cycle plays out every time when the world order changes. In the case of USA, a few of the
indictors like rising foreign debt, internal conflicts, rise in inflation, rising interest rates, have
marked their presence in US Economy. China with its aggressive strategies has emerged as the
clear heir to USA’s position in the world order and with the current situation the world is in
right now, it looks as if the time is not far when the shift will take place.
Limitations
1- The scope of this research is limited to the study of the Chinese Yuan. Other rising
currencies like the Canadian dollar, British pound, and Japanese yen that can potentially
compete with the US dollar have not been taken into account.
2- The strong dollar continues to rule because the US can continue running a deficit by
printing as many dollars as it wants without having to worry about inflation because of
the dollars high global demand. The US dollar continues to serve as a store of value all
around the world and is a powerful symbol in international banking. Therefore, the
prerequisites for a currency's collapse have not been satisfied.
3- China's currency has a number of flaws that make it unpalatable in the eyes of many
institutions. For example, Chinese citizens are only permitted to transfer out of China an
amount equal to 50,000 US dollars annually, showing that China believes it is necessary
to effectively imprison the wealth of its citizens at home in order to prevent them from
starting businesses abroad. China's own government writes all of its legislation in US
dollars, shows it is unsure of its own currency. If Chinese citizens were permitted to
exchange as much money as they wanted, there would be a significant selloff of Chinese
currency, which would reduce the value of Chinese currency in the foreign exchange
market.
4- In order to increase the competitiveness of exports, China also artificially reduces its value
on the foreign exchange market. This strategy has helped China strengthen its industrial
base, but it also demonstrates that the yuan does not truly have a fair value. China has a
currency that is both overvalued and undervalued at the same time when acting as a reserve
currency because of restrictions on its residents' ability to transfer money and its
manipulation of foreign exchange.
5- Many governments are not entirely comfortable with a foreign government having that
kind of power over them, as so China isn't really a viable alternative because it has a much
worse reputation for unnecessarily punitive economic actions. If US foreign currency
reserves are held exclusively in US dollars, the US can sanction those reserves. Because
Russia began an aggressive war with a foreign country, the US imposed sanctions on it.
China sanctioned Australia because it wanted to conduct an investigation into the cause of
the coronavirus to prevent another outbreak. The governments that issue foreign currency
reserves are subject to their whims, but some nations are just naturally more stable than
others.
Recommendation
There are four essential characteristics for a currency to be called the Reserve Currency of the
world: fair value, wide circulation, stability and wide acceptance. In this research paper only
two factors, wide circulation and wide acceptance, have been considered but whether the
currency is stable and is valued fairly has not been considered in this study. Therefore it is
recommended to conduct a more thorough study all four factors should be examined in depth.
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