Socrates once said, “All wars are fought on money,” a statement that underscores the profound link between financial power and global conflict. This insight is particularly relevant in the context of the growing rivalry between China and the USA. The rivalry between China and the USA has been increasing day by day. China, as an emerging country, is confronting the USA in the field of technology, trade, and economy. Currently, we have witnessed that the USA and China rivalry is shaping into increasing currency war where US wants the continuation of dollar while China wants to de-dollarize it. There are several reasons that why Beijing is pushing for de-dollarization and what are the steps taken by China to promote its alternative financial system.
Before embarking on to highlight the currency war between China and USA, it is important to shed some light on to the concept of de-dollarization. Dollar is the primary global reserve currency. All the Central Banks hold significant quantity of USD as a part of foreign exchange reserve. Furthermore, it is the dominant current for the trade – whether domestically or internationally. However, China is trying to internalize its Renminbi. This can be seen in China’s share in cross border payment in local currency where in just 13 years, China went from 0.3% to over 51%. Now question arises that why China is pushing for de dollarizarion.
Several factors are responsible in this regard. First, China wants its own currency in international money. It wants to achieve central role in global finance. China’s promotion of an alternative financial system is not about cheering on the demise of US dollar, but rather also about creating an alternative financial system without a dominant currency in which Yuan is accepted without any bias. Secondly, it is a response to the perceived vulnerability that comes with excessive dependence on the US dollar. The USA has an influence in all the global market. It can influence any country’s economic market with its monetary policies. An example that merits here is that of proposal of an Asian Monetary Fund (AMF) to shelter Malaysian economy. Malaysian Prime Minister, Anawar Ibrahim, advocated for AMF against rising geo political tensions and rapid US interest rate hike. Thus, this rising interest is giving chance to China to fill the gap and help its neighbor to use local currency.
Furthermore, in 2023, South African’s summit of BRICS has pointed out the adoption of new digital currency. BRICS+, a member of nine countries, now account 37.5% of the global GDP. Similarly, since Ukraine-Russia conflict, the trade between Beijing and Moscow has been increased to $240 billion. These entire developments manifest that China wants to de-dollarize. These developments have far reaching significance on China’s economy. Not only it reduces transaction cost but also helps China to hold the cart of global market.
There is no iota of doubt in the fact that Xi Jinping is trying his best to adopt the policies of de-dollarization; but question arises that how such a big economy would lose its influence. For now, China’s development does not pose a serious threat to the US. The creation of alternative financial system is not a simple task. The USD remains the dominant currency in the world. The U.S. dollar has been the top global reserve currency for many years, and it doesn’t look like that will change soon. About 60% of the world’s foreign exchange reserves are in U.S. dollars, around 50% of international trade uses U.S. dollars, and 90% of currency trading involves U.S. dollars. This makes the dollar by far the most traded currency. Changing this would be a huge challenge and would need a big shift in the global economy.
In conclusion, although some countries might want to cut back on their reliance on the U.S. dollar, it is unlikely to happen soon. The dollar’s position as the world’s top reserve currency is deeply established, and replacing it would need a major, coordinated effort across the global economy. The U.S. economy is still robust, and investors and countries around the world have a high level of trust in its financial system. Additionally, there are not many viable alternatives to the U.S. dollar, and shifting away from it would need substantial cooperation among countries. Because of this, de-dollarization is more likely to be a topic of conversation rather than something that will actually happen soon.
