As the communist nation of China seeks to expand its influence in the world economy, some developing nations are looking to the Chinese yuan as a means of lessening their reliance on the American dollar as the global reserve currency.
Throughout the eight decades after the conclusion of World War II, the United States dollar has been the dominant reserve currency, kept in large amounts by central banks and foreign enterprises to settle international trade and financial transactions. Against other major currencies like the Japanese yen and the British pound, the US dollar has surged over the past few years as other countries have struggled to recover from the lockdown-induced recession and overcome subsequent economic challenges.
As the Russian invasion of Ukraine threatens the international power balance, leaders in numerous emerging market economies have revived initiatives to reduce their economies’ reliance on the dollar. In an effort to improve ties with China, Malaysia has proposed establishing an Asian Monetary Fund with China’s support, while the United Arab Emirates and India have been in talks to begin trading certain commodities in rupees and Saudi Arabia has declared its willingness to engage in trade in currencies other than the U.S. dollar. The idea of a currency union between Brazil and Argentina to lessen their reliance on the dollar has also been proposed.
This phenomenon arises as China strives to become the global economic hub. Chinese President Xi Jinping’s Belt and Road Initiative has been described as a debt-trap diplomacy technique to strengthen political pressure in developing nations who default on their debts.
More than any other country, the United States has funded humanitarian and military aid to Ukraine, but in recent months China has also worked to broker peace between Russia and Ukraine. As sanctions from Western nations have prompted Russia to deepen relations with China, Russian economic players have begun to utilize the yuan more frequently than the dollar.
According to David Bahnsen, founder of The Bahnsen Group, a wealth management business located in Manhattan, “we are the ones giving them the opening to do so.” Bahnsen made these comments to The Daily Wire.
U.S. economic strength, free trade and money flows, and a tradition of protecting private property have all contributed to the dollar’s preeminent position in international finance. Bahnsen predicted that the dollar’s role as the world’s reserve currency would not change in the near future, calling it instead “the cleanest shirt inside the laundry hamper” but admitting that its “luster marginally decreasing.”
The United States gains bargaining power with trading partners like China thanks to the dollar’s role as the world’s reserve currency. However, “I wish we would focus on pure dollar stability and have the power to do so because of our reserve currency status,” Bahnsen said.
The Chinese government has been “intentional” about seizing any chance to strengthen the yuan. If China shows a stable and trustworthy currency exchange rate and a mature bond market founded in modern sensibilities, “settling trade in yuan will happen more and more,” Bahnsen said. Their currency and bond market have outperformed practically all others because of their efforts in this area during the past decade.