About the author: Jason Hsu is chief investment officer at Rayliant Global Advisors.
Since the early days of Russia’s invasion of Ukraine, it’s been clear that the choice to weaponize the U.S. dollar would have consequences. Sanctions on Russia’s access to U.S. currency are paving the way for the ascent of the yuan, China’s currency, as an alternative for clearance, settlement, and reserves—at least for countries willing to upset the U.S. This has been a gift from heaven for China’s leader, Xi Jinping.
Historical context will show how Xi may view this issue. Mao Zedong was the great leader who founded Communist China. Deng Xiaopeng was the great leader who lifted the nation from poverty by opening China to the world. More than anything else, Xi wants to be the great leader who makes China a global power to rival the U.S. If the yuan becomes a major global clearing and reserve currency, it will be evidence to the Chinese people that China has arrived. Some may even see it as definitive proof of a multipolar world, with China defining a new sphere of influence that ends U.S. hegemony.
Xi has long wanted to expand the yuan’s influence. But to succeed, he needed cooperation from other global powers. Until recently, there was little reason for governments to experiment outside the trusted and reliable dollar. Even U.S. frenemies and haters continued to use the dollar begrudgingly from a position of convenience or inertia.
But the world has now reached an uncomfortable realization that using and holding the dollar isn’t just expensive in terms of (previously) low interest rates. Events involving Russia’s war in Ukraine have suggested the dollar may be risky at times of crisis and conflict—precisely when a reserve is most valuable. This golden opportunity has not been lost on China. After securing his third term as president, Xi made courting the Middle East one of his most important priorities. Meanwhile, the U.S. relationship with Saudi Arabia is approaching its nadir.
Xi said on a trip to Saudi Arabia in December that China would start paying for oil with Chinese currency. The Saudi finance minister said his government is open to the idea. Those moves signal the beginning of the end of the petrodollar monopoly. This evolution isn’t limited to the Middle East. Despite fist fights between Indian and Chinese soldiers at their disputed border, a number of Indian firms have begun using the yuan to buy commodities. These shifts are significant because, for the yuan to gain a foothold as a global currency, there must be multiple willing participants. Oil deals in yuan could be limited to China and Saudi Arabia. For this disruption to amount to anything, other buyers must also want to hold and transact in yuan. India could do just that.
It may not be long before Beijing pressures its exporters to require payments in yuan for manufactured goods, further forcing global trades to move toward yuan clearance and thus increasing demand for yuan reserves. That would replicate the dollar’s path to global dominance. The dollar is the dominant clearing currency today precisely because, after World War II, the U.S. was the world’s factory, supplying depleted European allies with much-needed manufactured goods. Needless to say, the U.S. demanded payments in dollars.
Although China isn’t in that prodigious position, it does have leverage. The recent impact of its economic lockdowns reminded the world of its dependence on China even as it was becoming clear how the dollar can be weaponized in a crisis. Together, these developments made a powerful case for some governments to consider the yuan more deeply.
How long will it take for the yuan to play a more significant role? Who knows. The dollar also took decades to ascend. But the journey of a thousand steps does start with that first one. The footprints are already in the ground.
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