In today's interconnected world, the dynamics of global economics are continually evolving.
One topic that has been gaining prominence is the contingency for the Chinese Yuan (CNY) to surpass the United States Dollar (USD) as the world's dominant currency. But what does it mean for a currency to surpass another, and why is this significant in today's world?
When we speak of one currency surpassing another, we are referring to its rise in global prominence and influence. Since the end of the Second World War, the US Dollar has been the world's primary reserve currency. This means that it is widely accepted and held by central banks, governments, and financial institutions as a safe store of value and a medium of exchange for international transactions.
Therefore, the significance of a currency surpassing the USD in today's world cannot be overstated. It would represent a complete reordering of global economic power with far-reaching implications.
More specifically, a Yuan-dominated world would mean a shift in economic power from the West, led by the United States, to the East, with China at the forefront. This transition could reshape global trade, finance, and investment as the country controlling the dominant currency has significant influence over international financial institutions and regulations. As a result, the Yuan surpassing the USD could lead to China playing a more critical role in shaping the global geopolitical field and financial system.
If the Yuan overtakes the dollar, it could be increasingly used as the preferred currency for international trade, potentially reducing the dependency on the USD in global transactions.
How Could the Yuan Surpass the USD?
For centuries, consumers and nations have sought refuge in safer, more dominant currencies. One of the most significant examples being the British Pound Sterling during the 19th century when the British Empire was at its zenith. Investors favored the GBP due to the empire's economic and political power, making it a safe haven for investments.
Similarly, the USD rose to dominance in the 20th century, reinforced by the economic predominance of the United States and its role in post-World War II global reconstruction through initiatives like the Marshall Plan. However, the tides may shift as the Chinese Yuan (CNY) becomes a serious contender to challenge this long-standing status quo.
One of the factors that could cause this economic revolution is China’s economic prowess and growth. As China races towards becoming the world's largest economy, investors are taking note. China's allure lies not only in its sheer size but also in its role as a manufacturing and export giant.
China's remarkable growth trajectory serves as a testament to its economic might, attracting investors seeking both growth opportunities and a stable currency. The Yuan's appeal is strengthened by China's contributions to global trade and commerce.
Another critical factor is the country’s financial market reforms and its international acceptance. China's financial market reforms have been central to the Yuan's internationalization. The inclusion of the Yuan in the International Monetary Fund's Special Drawing Rights basket marked a significant milestone, signaling its growing acceptance on the global stage. Over recent years, China has steadily opened its financial markets to foreign investors, facilitating greater access with initiatives such as the Bond Connect scheme and the inclusion of Chinese A-shares in global indices, making it easier for investors to participate in China's financial markets.
On this matter, it is essential to mention China’s bilateral trade agreements and currency swaps by actively promoting the use of the Yuan in those agreements and encouraging other nations to transact its currency. The establishment of currency swap agreements with countries across Asia and Africa pushes these nations to trade in Yuan, bypassing the traditional dependence on the USD. A notable example is the China-UAE Currency Swap Agreement of 2012, which allowed the two countries to settle trade transactions in their respective currencies, bypassing the need for the USD and securing Chinese access to oil imports from the UAE, a crucial energy supplier, in Yuan.
Why is the US Anxious About It Happening?
The United States has legitimate concerns about the Yuan surpassing the USD.
First and foremost, because of the economic impact it would have. A decline in the USD's value could lead to the US facing higher borrowing costs, potentially leading to increased government spending and corporate expenses and affecting the American economy.
Secondly, the US would lose some of its influence over other nations, international institutions, and financial regulations/monetary policies.
Thirdly, the USA is concerned about exchange rate-related risks as companies engaged in international trade would face currency instability making exports and imports industries more volatile. Currently, many international transactions are conducted in USD, which provides stability while a shift to Yuan could introduce more volatility into the international financial system.
In conclusion, the possibility for the Yuan to surpass the USD can have far-reaching consequences, potentially impacting the US economy, borrowing costs, and currency exchange rates. While this transition has not yet been imminent and would be a complex and gradual process, it reflects the evolving global economic landscape. It would promise changes in trade, finance, and geopolitics, with implications for countries and the daily consumer, making it a topic deserving of close attention for young people everywhere.