The Russia-Ukraine conflict raises the Chinese Yuan, the US dollar remains invincible, this is the reason why the greenback cannot be 'dethroned'

The US has the world's most powerful economy and military , and is also the world's largest producer of crude oil. All of this gives China a clear incentive to hold onto its dollars.

Xung đột Nga-Ukraine đẩy Nhân dân tệ Trung Quốc vững chân, USD Mỹ vẫn bất khả chiến bại, vì sao không thể ‘hạ bệ’ đồng bạc xanh? (Nguồn: Getty)

China's yuan is increasingly on the path to becoming a major global currency and a serious rival to the US dollar. (Source: Getty)

The path to de-dollarization is certainly accelerating. Over the past few weeks, there has been a growing sense that the greenback is about to lose its status as the dominant international currency.

The position of the Yuan has increased sharply.

Recently, Malaysian Prime Minister Anwar Ibrahim declared that “there is no reason for Malaysia to continue to rely on the US dollar,” while China welcomed talks on an Asian monetary fund. At the same time, international transactions in renminbi (RMB) have increased while China and France recently completed the first renminbi-denominated liquefied natural gas (LNG) transaction.

In addition, China and Saudi Arabia have also agreed to build an 83.7 billion yuan oil refinery without any payments in dollars. Russian companies have issued a record $7 billion in yuan bonds in 2022.

The Russia-Ukraine conflict could give China’s yuan the boost it needs to become a major global currency – and a serious rival to the US dollar. The size and rapid growth of China’s economy is impressive.

The Northeast Asian nation has maintained one of the world's highest economic growth rates for more than a quarter of a century, lifting more than 800 million people out of poverty in just a few decades.

China is also the world's largest exporter and the most important trading partner of Japan, Germany, Brazil and many other countries. Based on market exchange rates, China's economy is the second largest in the world after the United States, but the largest globally based on purchasing power parity.

The yuan is now the fifth most traded currency in the world, a phenomenal rise from 35th place in 2001. It is also the fifth most used currency in global payments by April 2023, up from 30th place in early 2011.

Moreover, the RMB has replaced the Euro as Brazil’s second-largest source of foreign exchange reserves, so many believe it is no surprise to hear talk of the US dollar’s demise and the inevitable takeover by the Chinese currency.

However, the yuan still lags behind as a major global currency. This ranking can be misleading. The average trading volume of the yuan is still less than one-tenth that of the US dollar. Moreover, almost all transactions are conducted in US dollars, with very few transactions in other currencies.

And when it comes to global payments, the actual share of the yuan is just 2.3%, compared with 42.7% for the dollar and 31.7% for the euro. The yuan will also account for less than 3% of world foreign exchange reserves by the end of 2022, compared with 58% for the dollar and 20% for the euro.

The dominance of the US dollar

Going back in history, since 1975, the issue of de-dollarization has been mentioned by many people. Through research, people have found a number of articles in English, in which it said that the Organization of the Petroleum Exporting Countries (OPEC) is looking to cut all ties with the US dollar.

Kuwait's oil minister at the time announced plans to allow oil to be priced in multiple currencies (without specifying which ones) other than the greenback. Of course, the plan never came to fruition.

As the world's main reserve currency, the US dollar holds many important positions in global exchange that are difficult for any other currency to surpass. (Source: Xinhua)

A similar situation occurred in 2019 when the first oil contracts in yuan were signed. This was considered a new step towards de-dollarization in the world. However, so far, the plan has not been successful.

At present, about 90% of oil transactions are conducted in USD and according to the Bank for International Settlements (BIS), nearly 88% of international transactions are in USD. Finally, the greenback is certainly not giving up its leading position.

As the world’s primary reserve currency, the US dollar holds a position of importance in global trade that is difficult for any other currency to surpass. One unique advantage of the US dollar is that the majority of the world’s debt is issued in this currency. To repay US dollar debt, one must own it. This creates a global dependence on the greenback.

Likewise, most of the world’s oil trade is done in USD, especially in the Middle East. Despite recent speculation that the petrodollar system (another name for the USD) may be at risk, this is another route to global dependence on the USD and one that would be very difficult to replace.

In 2022, it was announced that Saudi Arabia would consider using the yuan instead of the dollar to sell oil to China, sparking talks of a post-dollar world. More recently, China and Russia have reportedly been ready to challenge the petrodollar.

However, despite the rumors and speculation, the USD has remained the dominant currency in oil transactions for over 50 years, while less than 3% of global oil trades are conducted in Chinese yuan. The USD has remained stable to this day.

There are also a number of fundamental structural factors that favor a dollar-centric global monetary system. The US currency benefits from extreme liquidity, while the renminbi does not. The greenback is freely convertible, while China’s currency does not.

Essentially, the US has the world's most powerful economy and military, and is the world's largest producer of crude oil. All of this gives China a clear incentive to hold onto its dollars.

Another factor reaffirming the greenback’s dominance is the role of military cooperation. In October 2022, Federal Reserve economist Colin Weiss published a study on the correlation between the proportion of USD in a country’s foreign exchange reserves and its military relationship with the US. Mr. Weiss explained that three-quarters of global USD reserves are held by countries with long-standing military ties to Washington.

Therefore, even in the unlikely event that the share of the USD in international trade and debt restructuring declines, the greenback still has the advantage to maintain its dominance.

However, the dollar’s unshakeable status as an unassailable international currency should not be misunderstood. In the long run, the only way the US can meet the growing global demand for safe assets is by expanding its financial capacity. This could undermine investor confidence in the greenback, leading to volatility and a self-fulfilling crisis.

Reliance on the USD as a single currency also creates a clear imbalance for both the US and its dependent countries. It depletes the domestic industrial capacity of the world's No. 1 economy in exchange for expanding its political and military influence abroad.

That said, barring a transformative shift in economic and geopolitical power, the US dollar is likely to remain the bedrock of the global economy for the foreseeable future.

For centuries, one reserve currency has been replaced by another, but that will not happen this century. The world is gradually moving towards a more decentralized global monetary system, where the US dollar will retain its position as the main reserve currency alongside several competitors, including the Chinese yuan. Such a natural arrangement will benefit global economies, but the US will still be the biggest beneficiary.

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