How China’s digital currency will thwart US dollar trap and help the world
- The digital renminbi is a sovereign currency fully backed by the state, does not require a bank account and has full oversight by Chinese banking authorities
- Developing countries will embrace the convenience of China’s digital payment systems, which have great poverty-relief potential for the world’s unbanked poor
The US dollar displaced the British pound as the world’s leading reserve currency at the beginning of the last century. Since the Bretton Woods Agreement in 1944 linked world currencies to the dollar, it has reigned supreme.
As China opened up and became integrated with the world trading and financial systems, it has been caught in a “dollar trap”, having to convert excess national savings into secure, internationally-convertible US treasuries.
Over the years, the US has enjoyed the dollar’s exorbitant privilege of almost unlimited money-printing, or “quantitative easing” in central bank parlance. As former US president Richard Nixon’s Treasury secretary John Connally famously said, “The dollar is our currency, but it’s your problem.”
Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, pointed out in 2011 that the world was living in the shadow of China’s economic dominance. More national currencies were moving in tandem with the renminbi instead of the dollar. Nevertheless, the dollar is being increasingly weaponised to impose economic sanctions on China.
However, owing to America’s dwindling domestic savings and a gaping current account deficit, Stephen Roach has warned that the dollar’s “exorbitant privilege” is about to end.
Driven by latest blockchain technology, China’s digital currency does not require a bank account. This has huge poverty-relief potential for the unbanked poor across the globe.
As Chinese banking authorities have full control, the digital currency will help combat illicit financial transactions. The financial data will facilitate the formulation and execution of monetary policies.
What is more, the digital currency does not depend on the US-controlled Society for Worldwide Interbank Financial Telecommunication (Swift) banking system. It is thus immune to dollar-based US sanctions.
The developing world accounted for 49 per cent of world GDP in 2010 and is expected to reach 60 per cent by 2030. Thus China’s growing global integration augurs well for the widespread acceptance of its sovereign digital currency, which would speed up the internationalisation of the renminbi.
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Additionally, China’s outbound tourism has occupied the world’s top spot since 2013. The digital sovereign currency is therefore well-timed.
Thanks to their vastly different performances during the pandemic, China’s economy is expected to overtake the United States’ five years earlier, by 2028, according to Britain’s Centre for Economics and Business Research.
All these developments will by no means dethrone the dollar all at once. No other sovereign currency, let alone the renminbi, can remotely compare with its global financial width and depth. Even falling by 10 per cent during the past two decades, the dollar still accounts for 62 per cent of global currency reserves.
However, China’s digital sovereign currency is now poised to mitigate the dollar trap, accelerate internationalisation of the renminbi and offer an escape route from dollar-based sanctions.
Andrew K.P. Leung is an independent China strategist. [email protected]