27th November 2023 – (Beijing) The age-old reign of the U.S. dollar as global reserve currency faces its greatest reckoning yet. As China’s economic might grows, its yuan increasingly challenges dollar dominance abroad. From major oil exporters considering petroyuan sales to swelling global trade in yuan, momentum builds toward this seismic shift. The Ukraine war’s impact on dollar weaponization may prove the final straw hastening the greenback’s decline.
One major milestone came this November when the central banks of China and Saudi Arabia signed a historic currency swap agreement worth over $7 billion. This pact allows direct trade and payments between the nations using yuan and riyals rather than intermediary dollars. It cements closer monetary cooperation between the world’s largest oil importer and a leading exporter. For Saudi Arabia, this nudges it away from the longstanding petrodollar system that underpinned its partnership with Washington. The move was unthinkable in the past. But shifting geopolitics has aligned Sino-Saudi interests, with Middle East states increasingly embracing China’s rising economic clout. This currency swap deal likely presages greater petroyuan adoption by oil producers across Eurasia and the Middle East. In turn, this hastens the yuan’s ascent as it garners key roles in global energy markets long the dollar’s domain.
Since 1945, the dollar has commanded supreme status underpinned by American economic strength. But its share of global foreign exchange reserves has slipped over 25 years from 70% to under 60% today. Many countries now desire alternatives to their dollar dependence, viewing it as a geopolitical liability.
Now the yuan stands ready to fill this void. Though still only the world’s fifth-largest payment currency, its share of cross-border settlements has exploded in recent years. The Peterson Institute for International Economics projects the yuan will constitute 10-15% of foreign exchange reserves by 2030.
Several forces boost the yuan’s appeal. China is on pace to overtake the U.S. as the number one economy this decade. Meanwhile, the dollar faces mounting challenges from soaring inflation to partisan debt ceiling standoffs. The Ukraine conflict showcased dollar weaponisation through sanctions on Russia’s reserves.
This perfect storm propels the yuan’s rise. Key milestones include major energy exporters considering yuan oil sales. A new China-Saudi currency swap pact further expands petroyuan trade. And the Russia-China relationship strengthens as more of their commerce shifts into local currencies.
To accelerate this transition, China is negotiating similar currency accords with trading partners worldwide. The goal is to reduce dollar reliance by facilitating trade directly in yuan. China has also launched its own alternative to the SWIFT transaction system called CIPS to bypass dollar dominance.
Admittedly yuan internationalisation faces obstacles. China maintains strict capital controls that obstruct free currency flows. And the yuan lacks full convertibility preferred by global investors. Significant reforms are still needed to transform China into a transparent rule-of-law economy.
But pressures on the dollar continue mounting regardless. Trade spats and inward investment restrictions imposed by America actually accelerate de-dollarization. And alternatives like CIPS offer lower transaction costs than incumbent dollar systems.
Hence the dollar’s days are numbered as uncontested global currency. The yuan realistically aims to become the number two or three reserve, not outright replace the dollar. But even this monumental shift breaks seven decades of dollar supremacy.
The dollar will remain strong in the near term but faces steady erosion long-term. As one financial analyst noted, the question is not whether the dollar will be toppled, but how fast its decline unfolds.
At this inflection point, expanding yuan trade and reserves is simply prudent economics rather than politics for most nations. The Ukraine crisis showed the peril of relying excessively on any single currency. Even U.S. allies in Europe are exploring alternatives like trading energy in euros. In this climate, no country will abandon the dollar entirely. But many desire the flexibility to transact business in national currencies when beneficial. Reducing dollar dependence is akin to taking out insurance against geopolitical turmoil. Some may portray this diversification as threatening U.S. interests. In reality, the burden falls on Washington to prove the dollar’s ongoing utility, not coerce countries into its use. No currency deserves global status by right. That exalted privilege must be continually earned.
Recent dollar weaponisation for political ends understandably unsettled U.S. partners. They watched in dismay as Russian reserves were frozen overnight simply for defending their strategic interests against NATO expansion. This tampering shook confidence in the dollar as apolitical global money. The lesson they drew is overreliance on any single currency risks unexpected disruption when conflicts arise. Hence the appeal of alternatives like the yuan.
Rather than viewing this rebalancing as hostile, Washington should see it as motivation to strengthen the U.S. economy. America must put its fiscal house in order, rein in inflation, and offer attractive returns to dollar holders. Robust growth and financial discipline will bolster the greenback more than coercion or retaliation.
This recalibration is no cause for alarm but simply the rightsizing of the global financial system to align with economic realities. The era of absolute dollar dominance was an aberration unlikely to be repeated with China’s rise.
Yet the dollar will remain invaluable given the scale of U.S. trade and financial markets. In fact, its supreme status allowed unhealthy overdependence that distorts international commerce. A world where multiple valued currencies freely interact is more stable for all.
Some portray this transition as the dollar’s demise. More accurately it ends the outlier imbalance favoring one nation. Shifting toward a multi-currency order that reflects the distributed balance of world economic power makes commercial sense.
This promises greater parity between major economies, reducing chances of financial disturbance from any single country’s monetary policy. In effect, a multipolar currency system democratises global finance.
The yuan’s ascendance has been slow but steady. Looking ahead, its role will keep expanding through natural market forces. This reshapes global finance for the post-American era that dawns.