According to Business Insider, the Chinese yuan is one of the main contenders challenging the greenback’s dominance. The yuan is expected to replace the US dollar as a reserve currency. However, such a scenario is still causing some doubts.
The fact is that China’s authorities do not fully support the idea of making the yuan the global reserve currency. Beijing is manifesting an unwillingness to open capital accounts and face a deficit.
The global community had to deal with the issue of a new reserve currency just after the introduction of sanctions against Russia. The key aim of such measures is to reduce Russia's dollar currency reserves. In this light, Beijing may also see its debt assets frozen. As a result, authorities of some countries started considering the issue of an alternative to the US currency. However, the use of the Chinese yuan in trade and stashing it in reserves are still under discussion.
There are three reasons why China is not so keen on dedollarization and turning its national currency into a reserve one.
1) “The Chinese government does not want to liberalize its currency and allow money to move freely in and out of its economy,” Business Insider writes. Analysts suppose that China is ready to upset the global dominance of the United States only on its terms. Notably, in the last 10 years, the National Bank of China has not been promoting its national currency. What is more, the regulator fears problems with financial security.
2) The Chinese authorities cannot afford to deal with a constant deficit like the US does. If the yuan becomes a reserve currency, China may face a current account deficit like the US. At present, global demand for the greenback exceeds demand for any other currency. However, such popularity comes at a cost. According to Yale economist Robert Triffin, “the US will need to contend with ever larger amounts of deficit in order to maintain its reserve currency position.”
Currently, China cannot afford itself a persistent deficit. However, it is impossible to provide countries with enough reserves of yuan without sliding into such a deficit.
3) Unfavorable geopolitical factors are also preventing the yuan from becoming a reserve currency. However, the global situation may change at any moment. Against the backdrop, the widespread use of the yuan may allow the country to avoid sanctions and give other benefits. Even in this case, the US dollar will maintain its dominance.
At the moment, the yuan is at the peak of popularity. Most analysts consider it the main rival to the US dollar, especially amid tension between the United States and China. Their relations are also souring because of the alliance forged by Beijing and Moscow. Meanwhile, the euro may also become a fierce competitor as it is more widely used than the yuan. According to estimates, keeping capital in EUR could reduce geopolitical risks and leave room for investors to maneuver.
