China was the first major economy to release a blockchain-enabled digital version of its currency, the yuan, and this development has caused some in Washington to worry about the dollar’s position. America as the global reserve currency is at stake.
“Anything that threatens the dollar is a matter of national security. This threatens the dollar in the long run, ”said Josh Lipsky of the Atlantic Council told the Wall Street Journal, in a feature that describes the digital yuan as “the reimagining of the currency that could shake a pillar of US power”.
China certainly has reason to oppose a global economic order in which nearly 90% of foreign exchange transactions involve dollars and more than 60% of global central bank reserves are held in assets. in dollars, as the US government increasingly intensifies this practical leverage to punish countries and companies it considers acting contrary to its national interests.
Diana Choyleva, chief economist at Enodo Economics focused on China, argued in a note on Monday to clients that recent events, including leaks from National Security Agency contractor Edward Snowden that the US government oversees transactions on the Global Association’s Interbank Financial Telecommunication network, has served as a “wake-up call” for Chinese policymakers.
“The Chinese Communist Party, obsessed with control and very aversion to any foreign interference in its domestic affairs, realizes that it depends on a global payment system. can be exploited by US intelligence agencies and Washington can use it to deny Chinese banks access to dollar-denominated funding, ”she wrote.
However, according to Eswar Prasad, former director of the China division of the International Monetary Fund and professor of economics at Cornell University, China has a geopolitical incentive to see the dollar as a reserve currency. of the world, it is not clear that a digital yuan will support that goal. .
“Most of the cross-border payments for trade or finance are already digital, so it’s hard to imagine a digital yuan having a big impact on international payments,” he said. . He argued that a more important development was the introduction in 2015 of China’s Cross-Border Payment System, a rival of SWIFT. That system, combined with the digital yuan, will make it easier for countries facing US sanctions, including Russia, Iran, and Venezuela, to be paid in yuan. oil or other exports.
But Prasad said there is little chance that a digital yuan will threaten the role of the US dollar as the global reserve currency, which depends on its size and liquidity. Unrivaled US debt markets, the flexibility of the dollar’s exchange rate, laws allowing free capital to enter and exit the country, and an institutional framework for checking and balancing, a judicial agencies and independent central banks.
While China has made strides in developing its financial markets, allowing the value of its currency to be determined by market forces and allowing capital to flow more freely, there are There is little reason to expect the country to quickly adopt the kind of Western institution that global investors are looking for as an environment to protect their savings, he said.
Indeed, even the share of China’s own merchandise trade paid for in the renminbi, as the renminbi is known, was still below its peak in 2015, before the government was in thereby suppressing capital inflows abroad, leaning towards international investors towards China. Financial liberalization is not a one-way street.
According to Stephanie Segal, senior fellow at the Center for Strategic and International Studies, domestic policy, not geopolitics, is the actual driving force for the digital yuan’s implementation.
“A lot of financial activity in China is going on platforms like AliPay and WeChat Pay, the central bank and other regulators don’t have much information about that activity and that’s what the Chinese government is doing. Quoc doesn’t like it, ”she said.
Meanwhile, the Chinese economy mainly relies on the prohibition of state-owned banks, which will turn ineffective loans to avoid disruption of important economic institutions. default. “That can be sustained as long as you have an ongoing source of funding,” in the form of consumer deposits, but an ever-evolving private money system could undermine that, says Segal.
Indeed, the main reason that many governments, including the United States, are experimenting with central bank digital currencies is for the convenience of the people and improving the efficiency of macroeconomic policy. .
While negotiating coronavirus stimulants, Freely promoted lawmakers for laws that include the creation of a Federal Reserve-backed digital dollar that Americans can hold in individual accounts with the central bank. The move will make it easier for the federal government to issue stimulus money to individuals, especially to the millions of Americans who don’t have ties with private banks.
Federal Reserve currently researching ideas of a digital dollar, but Chairman Jerome Powell has said it won’t move if it wins the support of a majority of the US public and Congress first. March, Powell said “Because we are the world’s main reserve currency, we don’t have to rush to work on this project – we don’t need to be marketing first.”