Can a Digital Renminbi Challenge the Green Back?
The US Dollar has reigned supreme in global trade and finance. But China is challenging that supremacy with its new digital Yuan.
The US Dollar has reigned supreme in global trade and finance. But China is challenging that supremacy with its new digital Yuan.
Since WWII, the Bretton Woods system has had control of global finance and trade. After WWII, global powers at the Bretton Woods conference agreed to create the International Monetary Fund (IMF) and the World Bank. Also, after WWII the US had the most powerful economy and military in the world. For this reason, the US Dollar was crowned the world’s reserve currency. This means that all trade in the world is conducted by US Dollars. All trade conducted by US Dollars means that there would be an ample amount of demand for US Dollars. The Bretton Woods system did go through a bit hiccup when President Nixon went off the gold standard. But things changed even more for the US Dollar when then-President Richard Nixon and his Secretary of State Henry Kissinger went to Saudi Arabia and guaranteed the Kingdom’s protection in return for OPEC selling oil in US Dollars. This means that all oil trades were done in US Dollars (this was also known as the PetroDollar). This increased the demand for US Dollars even more. Many, like former French President Charles de Gaulle, called America’s power in global trade and finance an “exorbitant privilege.” But can the US Dollar stay on top of the finance world?
No other nation has been challenging the US’s current status in global finance than China. China’s economy has grown from just $360.8 billion in terms of GDP to $13.6 Trillion in just 30 years. China is now the second-largest economy in the world in terms of GDP and the largest economy in terms of purchasing power parity (PPP). As China’s share of the economic pie has grown, it is challenging the current Bretton Woods System. For instance, to challenge the World Bank, China along with the other BRICS nations (Brazil, India, Russia, and South Africa) created the BRICS Development Bank. To challenge the IMF, China created the Asia Infrastructure Investment Bank (AIIB). The United Kingdom, America’s staunch ally, was the first European nation to be a founding member of the AIIB. Since then staunch allies of the US like Australia, South Korea, and many European nations are founding members of the AIIB. This shows how other nations want to be close to China given their economic power and attract Chinese investment to their nations. China also wants to internationalize the Renminbi.
China has made no secret that it wants to internationalize its currency. As of 2015, Since 2008 China has made currency swaps deals with more than 30 nations. Some of these nations include our allies like the UK, EU, Australia, and Canada. Even the IMF included the Chinese Renminbi to its reserve currency bucket (which originally included the US Dollar, Sterling Pound, Japanese Yen, and the Euro). Renminbi internationalization also means challenging the US Dollar hegemony.
China has also made no secret that it wants to challenge and maybe replace the Dollar as the global reserve currency. Challenging the Dollar reserve status means building an alternative to the SWIFT payment system. The SWIFT payment system has given immense power to the US government and Wall Street Banks. Washington was able to cut Iran from the SWIFT payment system as part of the sanctions against Tehran. This was a wake-up call to Beijing. This lead to the leaders of China and Russia with other emerging market nations (like Brazil, India, and Russia) to come up with alternatives to the SWIFT system.
Part of creating an alternative Dollar payment/SWIFT system means digitizing the Renminbi. Digitizing the Renminbi is part of Beijing’s strategy to be the global leader in core technologies like Blockchain, AI, Electronic Vehicles, and Quantum Computing by 2049. This might be a surprise for many Americans but China is already ahead in many of these technologies compared to the West. While Americans are using checks, credit cards, and even cash, the Chinese do all of their purchases via their WeChat or AliPay app. 621 million Chinese (half of the population) already use these payment apps to pay for their needs. President Xi Jinping has pledged to invest $1.4 Trillion (that’s with a T) to further research and be a leader in these technologies (this is while President Trump is cutting the budget of the National Science Foundation that funds a lot of these technological research in the United States). China understands that to be a global superpower, along with having an international currency and modernizing its military, it has to be a leader in modern technology. As Mark Yusko, CIO of Morgan Creek Capital Management said it best, in the 21st century China gets that the new global war is fought not with ships but with “chips.”
China has already created a pilot version of this national cryptocurrency. This cryptocurrency pilot program was launched in Shenzhen, Suzhou, Chengdu, and Xiong’an (a satellite city in Beijing). This is part of China’s Blockchain-based Services Network (BSN). BSN will be the backbone infrastructure technology for massive interconnectivity throughout mainland China. This technology will connect city governments, companies, and individuals. For more on this technology, I highly recommend this interview with Professor Michael Sung. He is the Founder and Co-Director of the Fudan Fanhai Fintech Research Center at Fudan University in Shanghai, China (source: CoinDesk).
The creation of this Blockchain network means that this technology can be spread to other nations. This is part of China’s Digital Silk Road where One Belt One Road nations will be connected via Blockchain, Fiber Optics, and 5G (with Huawei leading the way in this technology). This will certainly give nations like Venezuela, Iran, and Russia, which are under sanctions from the US, the incentive to trade with China using the digital Renminbi (thus bypassing American payment systems). Even Washington’s long-time allies in Europe and NATO ally Turkey, have shown interest in creating an alternative payment system to challenge SWIFT. This accelerated when the US opted out of the Joint Comprehensive Plan of Action (JCPA or Iran Deal). Europe, in particular, is interested in doing more business with Iran but are unable to do so because Iran is not part of the SWIFT system. This has prompted an interest in the EU to create a payment system alternative to SWIFT. During the latest Shanghai Corporation Organization (SCO — an organization created by China and Russia to challenge the western led NATO) nations meeting, Pakistani PM Imran Khan suggested SCO nations trade with their own currencies without Dollars. With the creation of the digital Renminbi, this may give many of these nations an incentive to join the Digital Renminbi network and trade with each other while bypassing the Dollar system. The Digital Renminbi can also have serious implications for the PetroDollar.
Even Saudi Arabia, the nation that was the foundation for the PetroDollar, is looking east. The Crown Prince of Saudi Arabia, Crown Prince Mohammad Bin Salman (MBS), is making arms deals with Russia (Riyadh was interested in buying the S300 and S400 Anti-Aircraft Missile System from Moscow) and increasing ties with China. One of the main reasons why there is a conflict between MBS and the older generation of the House of Saud is because of the fact that while the older generation wants to maintain Riyadh’s relationship with the U.S., MBS wants to increase ties with an emerging east. Saudi Arabia has also been selling its oil in gold-backed Renminbi. These are all reports according to journalist Max Blumenthal. Nations like Russia and China have been challenging the PetroDollar for a long time. The $400 billion 30 year deal signed between Russia and China to provide Russian Natural Gas to China is all done by local currencies. Russia (3rd largest oil and largest natural gas producer) and China (largest commodity importer) agreed to ditch the dollar and trade with local currencies. Rosneft, Russia’s state-run oil company (also under sanctions from Washington) pledged to end doing business with the Dollar. With large oil producers like Iran and Venezuela under sanctions from Washington, it is a great incentive for these nations to trade using the digital Renminbi and bypass the Dollar payment system. With MBS’s increasing interest in getting close to Beijing and Moscow, a Saudi adoption of the digital Renminbi can erase the Dollar’s role in the global oil trade.
The biggest question is whether if the Digital Renminbi will be backed by gold? Both the Chinese and Russian Central Banks have been reducing their US Treasury holdings and buying up a lot of gold. Russian Central Bank gold reserves stand at 2,219.2 metric tons and People’s Bank of China’s (PBOC) gold reserves stand at 1,936.5 metric tons. According to Fund Manager Mark Yusko, he believes that China’s plan is to back this digital currency by gold. He also believes that a successful rollout of this digital currency will give a big boost to cryptocurrencies as a whole.
King Dollar now dominates global trade and finance, and according to economist Eswar Prasad (Tolani Senior Professor of Trade Policy at Cornell University), the Dollar will remain the reserve currency for the foreseeable future. Many nations still prefer to hold Dollars in their Central Bank reserves. But China’s Digital Currency will certainly give many nations, especially nations under sanctions from Washington, a chance to trade and bypass the US Dollar system. This should be a warning to Washington. Washington’s preferred method of punishing nations includes financial sanctions. But according to Professor Kishore Mahbubani of the National University of Singapore’s Lee Kuan Yew School of Public Policy, as more nations and entities are sanctioned and the Dollar is weaponized, the incentive for trading and settling payments with alternative currencies and payment systems will further increase. This is one of the main reasons for Beijing to create this digital currency. To bypass US payment systems and challenge the Dollar.
The information I have provided is for informational purposes only. I am not a registered investment advisor. Please consult a professional before making any decisions related to investing. Investing involves risk.
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