Can Digital Yuan Challenge US Dollar's Dominance in International Finance?

China's central bank is testing its digital currency in several major Chinese cities. The chairman of US Federal Reserve has recently confirmed that the US Central Bank is working on digital dollar. The State Bank of Pakistan announced in 2019 that it was developing a digital currency. It seems that the popularity of Bitcoin has triggered serious worries of loss of control of the official financial systems among the central bankers around the world. China's substantial lead in digital currency could put it far ahead of the US in the future of global payments and financial settlement. It could eventually displace the US dollar and provide China with the immense global financial power that the US currently enjoys. 

Digital Yuan

Central Bank Digital Currency (CBDC):

What Is a Central Bank Digital Currency (CBDC)?  Investopedia defines it as a digital currency that "uses a blockchain-based token to represent the digital form of a fiat currency of a particular nation (or region)". A CBDC is centralized; it is issued and regulated by the  country's Central Bank. Unlike decentralized cryptocurrencies like Bitcoin, a CBDC would be centralized and regulated by a country's monetary authority.  


Motivations for such currencies are many, but the key one is to maintain control of the national and global finance. Another worry is that the use of unregulated digital currencies like Bitcoin could enable serious domestic and international crimes. It could also make tax evasion easier and hurt governments' ability to support public expenditure on education, healthcare, physical infrastructure, public safety, national defense and other priorities. 
 
Digital Yuan:
 
The People’s Bank of China, the Chinese Central Bank, is testing its e-yuan digital currency in Shanghai, Chengdu and other major cities. It has filed more than 100 patent applications for its digital currency. Reports indicate that the experiments are going smoothly, and soon people will have the option of downloading a government-issued digital wallet. Unlike commercial payment processors such as WeChat Pay and Alipay, the official Chinese version will be equivalent to an account at the central bank with the same guarantee as hard cash, according to The Economist magazine.  China is far ahead of of the rest of the world, including the United States in the development of a central bank-backed digital currency (CBDC). This could put it far ahead in the future of global payments and financial settlement. It could eventually displace the dollar and provide China with the immense global financial power that the US currently enjoys. 
China has set up a partnership with SWIFT, the Society for Worldwide Interbank Financial Telecommunications, that manages the global system for cross-border payments, through its digital currency research institute and clearing center.  SWIFT is a major vehicle for the United States to enforce its unilateral sanctions on countries like Iran, North Korea and Venezuela. China offers CIPS, cross-border interbank payment system, as an alternative to SWIFT. CIPS has only about 80 member banks worldwide compared to over 11,000 banks using SWIFT. 
Digital Dollar: 
US Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have confirmed last week that they are working on digital dollar as a high-priority project. 
US Treasury Secretary Janel Yellen has been quoted by the media as saying: “I gather that people at the Federal Reserve Bank of Boston are working with researchers at MIT to study the properties of it. We do have a problem with financial inclusion. Too many Americans really don’t have access to easy payment systems and bank accounts. This is something that a digital dollar, a central bank digital currency, could help with. I think it could result in faster, safer and cheaper payments.”  
Digital Rupee: 
A top official of the State Bank of Pakistan, the nation's central bank, announced in April 2019 that the institution aims to issue a digital currency (Central Bank Digital Currency or CBDC) by 2025, according to media reports.   Speaking at the launch of regulations of Electronic Money Institutions (EMIs), central bank officials said that EMIs will be non-bank entities to be licensed by the central bank to issue e-money for the purpose of digital payments. Pakistan's finance minister Asad Umar and the central bankers said they are targeting Pakistan's economy to go fully digital by 2030.
More recently, the State Bank of Pakistan launched Raast, a digital payment system.  It is essentially a pipe that is intended to connect government and financial institutions with consumers and merchants with each other to process payments instantly at very low cost. Raast will be boosted by Pakistan government's decision to use it to pay salaries, pensions and pay welfare recipients under Benazir Income Support and Ehsaas Emergency Cash programs. 
Raast digital payment infrastructure represents a great leap forward for the use of financial technology (FinTech) and financial inclusion in the  country.  It will also promote e-commerce in Pakistan. Undocumented economy poses a serious threat to the country because it creates opportunities for criminal activities and tax evasion.  Raast is part of the government's effort to modernize payment systems and document the nation's cash-based informal economy. 
America's Global Financial Power: 
There's a common perception that the United State is abusing its extraordinary financial power to arbitrarily punish countries through its unilateral financial sanctions. This power stems mainly from the fact that the US dollar is the main international reserve and trade currency. It allows US to control multi-lateral financial institutions like SWIFT, World Bank, IMF and FATF. Many countries, including major US allies in Europe, are now looking to find alternatives to SWIFT. This has been specially true since former US President Donald Trump existed the JCPOA (Joint Comprehensive Plan of Action) agreed among the 5 permanent members of the UN Security Council (P5) plus Germany. Here's an excerpt of a recent New York op ed by Peter Beinart: 
"By deluding themselves about the extent of America’s might, they are depleting it. A key source of America’s power is the dollar, which serves as the reserve currency for much of the globe. It’s because so many foreign banks and businesses conduct their international transactions in dollars that America’s secondary sanctions scare them so much. But the more Washington wields the dollar to bully non-Americans into participating in our sieges, the greater their incentive to find an alternative to the dollar. The search for a substitute is already accelerating. And the fewer dollars non-Americans want, the harder Americans will find it to keep living beyond their means."
 
Summary:
Central Bank Digital Currencies (CDBDs) are gaining momentum with the talk of digital yuan and digital dollar. Motivations for such currencies are many, but the key one is to maintain control of the national and global trade and financial systems. If successful, these new currencies and associated payment systems could challenge the global financial power of the United States and fundamentally transform banking as we know it. 
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  • Riaz Haq

    Top 10 Countries that Export the Most Goods and Services (Current US$ millions - World Bank 2020)

    https://worldpopulationreview.com/country-rankings/exports-by-country

    Rank Country Exports (Current US$)
    1 China $2,723,250.43
    2 United States $2,123,410.00
    3 Germany $1,669,993.51
    4 Japan $785,365.75
    5 United Kingdom $770,478.62
    6 France $733,165.40
    7 Netherlands $711,504.80
    8 Hong Kong (China SAR) $612,566.52
    9 Singapore $599,216.28
    10 South Korea $596,945.20

    Profiles of the world's largest exporters
    1. China
    Aside from the European Union (which is a collective of many countries), China is the world’s largest exporter. In 2020, China exported an estimated $2.72 trillion worth of goods and services, primarily electronic equipment and machinery such as broadcast equipment, computers, integrated circuits, office machine parts, and telephones. In 2018, China’s exports made up about 10.78% of the global total.

    2. United States

    The U.S. is the second-largest exporter in the world, with an estimated $2.12 trillion in exports for 2020. The largest exports of the U.S. are crude and refined petroleum; integrated circuits; pharmaceuticals and medical instruments; and aircraft including planes, spacecraft, and helicopters as well as their replacement parts. One of the reasons that the United States lags behind China in exports is the cost of labor. Many goods cannot be produced, manufactured, or assembled in the U.S. for a price comparable to that in China.

    3. Germany
    Having exported an estimated $1.67 trillion worth of goods and services in 2020, Germany is the world’s third-largest exporter. As one of the most technologically advanced countries in the world, Germany’s main exports include automobiles (BMW, Mercedes-Benz, Porsche, Audi, Volkswagen), pharmaceuticals (Bayer), aircraft, machinery, electronics, and chemicals. Germany is the third of three countries to have exports exceeding $1 trillion, behind only China and the United States.

    4. Japan
    Japan’s exports for 2020 were valued at an estimated $785.4 billion. Japan’s major exports include automobiles (Toyota, Honda, Nissan, Mazda, Suzuki, more) and automobile parts, integrated circuits and electronic devices (Nintendo, Panasonic, Sony, and many more). Japan's largest export customers are China, the United States, South Korea, Taiwan, and Hong Kong.

    5. United Kingdom

    The United Kingdom ranked as the fifth-highest exporter in the world in terms of dollar value in 2020, shipping an estimated $770.5 billion in goods and services to international customers. The U.K.'s top exports include cars (Bentley, Jaguar, Mini, Rolls-Royce, more), gas turbines, gold, medicines, hard liquor, antiques, and crude petroleum (which is often first imported from Norway, then exported to the rest of Europe, as well as China and South Korea).

  • Riaz Haq

    Arnaud Bertrand
    @RnaudBertrand
    SCMP editorial: https://scmp.com/comment/opinion/article/3242880/dollar-still-king-...

    "The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. The central banks of both countries have agreed on their first currency swap...

    In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other.

    In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift."


    https://x.com/RnaudBertrand/status/1728923824996139481?s=20

    ---------------------

    The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. The central banks of both countries have agreed on their first currency swap worth a maximum of 50 billion yuan (HK$55 billion) over the next three years.

    In immediate terms, the pact will foster bilateral commerce denominated in both the yuan and the riyal. In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other.

    In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift. It has been a very long time coming.

    Almost a year ago, President Xi Jinping made a historic visit to Riyadh, followed by Hong Kong Chief Executive John Lee Ka-chiu in February. A flurry of deals followed.


    The Shanghai Stock Exchange and its Saudi counterpart have started collaboration on cross-listings, including exchange-traded funds (ETFs), financial technology (fintech), environmental, social and governance (ESG) and data exchange.

    China, Saudi Arabia central banks sign currency swap accord to foster trade
    21 Nov 2023
    The People’s Bank of China (PBOC) building in Beijing on Tuesday, April 18, 2023. Photo: Bloomberg
    The Hong Kong Monetary Authority, the city’s de facto central bank, and the Saudi Central Bank have enhanced ties covering the latest technologies in regulatory supervision and monitoring, and in financial fields such as tokenisation and new payment systems.

    However, the latest currency swap pact will be the most important. It means trade can be conducted in local currencies, instead of defaulting to the US dollar. This may be seen as a challenge to US dollar dominance. Perhaps in the longer term, it is. But there is a good economic reason.

    The current US federal interest rate of 5-plus per cent has pushed the dollar to historical levels against most other currencies, making trade denominated in the dollar more expensive.

    There are obvious advantages for two big trade partners like China and Saudi Arabia to be able to utilise a local-currency option, which will help relieve pressures from having to trade in a more expensive currency.

    Global “de-dollarisation” may take a while yet, but the trend already reflects cracks in a global economy long used to US currency settlements.

    The yuan may or may not pose a challenge to dollar hegemony, but its internationalisation continues apace – to the benefit of both the Chinese and global economies.

  • Riaz Haq

    The era of US dollar dominance is 'finished,' says Wall Street veteran who just retired after 54 years


    https://markets.businessinsider.com/news/currencies/dick-bove-banks...

    "The dollar is finished as the world's reserve currency," Dick Bove, who retired as a financial analyst after 54 years this month, told The New York Times. Bove, 83, predicted that China's economy would surpass America's in size.

    The dollar's reign as the world's reserve currency is nearly over, Dick Bove says.

    The newly retired bank analyst blamed corporate offshoring and flagged the threat posed by China.

    Bove highlighted the de-dollarization trend and said other analysts are too bought in to admit it.

    The US dollar has been the lifeblood of global finance and trade since World War II — but one Wall Street veteran thinks the end of that era is nigh.

    "The dollar is finished as the world's reserve currency," Dick Bove, who retired as a financial analyst after 54 years this month, told The New York Times.

    Bove, 83, predicted that China's economy would surpass America's in size. He blamed the outsourcing of US manufacturing to other countries, arguing that trend has given other countries more control of international production, the global economy, and worldwide money flows.

    He also suggested that cryptocurrencies such as bitcoin could help fill the void left by the dollar's shrinking influence.

    Dollar-denominated assets make up nearly 60% of international reserves, per the International Monetary Fund. However, several countries are embracing "de-dollarization" — working to erode dollar dominance — especially after the US took advantage of Russia's reliance on the greenback to levy sanctions against it following its invasion of Ukraine in 2022.

    Nations ranging from Brazil and Argentina to India and Bangladesh are exploring the use of backup currencies and assets, such as the Chinese yuan and bitcoin, for trade and payments.

    Several governments have blasted the excessive influence of US monetary policy on other economies and currencies, the dollar's strength for pricing out poor countries from imports, and the diminishing need for a petrodollar now the US has achieved energy independence through domestic shale oil and green energy production.

    Bove, who worked at 17 brokerages during his career, told the Times that analysts who aren't forecasting dollar doom are simply "monks praying to money" who are unwilling to bite the hand that feeds them: the traditional financial system.