Chinese Yuan Far From Dethroning US Dollar as Global Reserve Currency, Expert Says

A Chinese bank employee counts 100-yuan notes and US $100 bills at a bank counter in Nantong, Jiangsu Province, on Aug. 28, 2019. (STR/AFP/Getty Images)

Although Brazil and China reached an agreement to conduct trade in their own currencies rather than the U.S. dollar, the Chinese yuan is far from becoming a global reserve currency, according to Milton Ezrati, chief economist at Vested, a New York-based communications firm.

Beijing hails the agreement as a step toward global de-dollarization and an increase in the internationalization of the yuan.

Wang Youming, senior research fellow and director of the Department for Developing Countries Studies at the China Institute of International Studies, told Chinese state-run media Global Times that Washington’s “irresponsible monetary policy, especially continuous interest-rate hikes, has led to depreciation of the Brazilian real and increased costs in transactions.”

Erzati said that the deal is an attempt to elevate the yuan as an international currency, yet, “the yuan is a long way from an international reserve currency such as the dollar.”

According to the expert, China does not have the financial markets to support financial arrangements in yuan, which is one of the requirements for a world reserve currency.

“If you are the world’s reserve currency, as the dollar is, then traders all over the globe have to hold your currency, because that’s the way they do their business. If they hold your currency, they want a place to invest it,” Ezrati recently told “China in Focus” on NTD, the sister media outlet of the Epoch Times.

Obstacles Regarding Financial Markets

Erzati contended that in such a case, traders in yuan might face difficulties in securing markets to invest in because China controls the flows of money into and out of the country.

Therefore, he said, “It’s not very encouraging to set themselves up as a reserve currency and then say to people, ‘You have to ask for our permission to move the money.’ So they have to open their financial markets in order to become the reserve. And the Communist Party is not about to do that.”

“It might hurt Washington,“ he added, ”that China has supplanted the dollar in a relationship with Brazil or Saudi Arabia, or many countries that have joined the Belt and Road” initiative, a global infrastructure development plan launched by China across the developing world in 2013.

Beijing has devised a number of workarounds, including currency swaps and the China International Payment System (CIPS), an alternative to the SWIFT system that allows international settlement in yuan. Although the total volume of trade settlement has been small, 103 countries have joined so far.

“I’m sure it does irritate them. Washington loves power,” he said, “and this is a slight erosion in that power. But I don’t think it’s a challenge to the dollar as the world’s reserve currency.”

In his opinion, if the Chinese yuan manages to dethrone the dollar, Americans “all of a sudden would have less international buying power and would feel poor and would be poor ... But it’s a long way from happening,” he said.

Revoke Developing Country Status

On March 27, the U.S. House of Representatives passed a bill to revoke China’s status as a developing country by a vote of 415–0. The bill would require the U.S. Department of State to influence international organizations to designate China as a high-income, upper-middle-income, or developed country and to suspend the special treatment China has enjoyed as a developing country in various international organizations.

Erzati said that if the United States could exert influence on other countries to strip China of this designation, “it would make it a little more difficult for China to maneuver.”

Yet, he noted that China has broken the rules many times.

“So I doubt it would stop the Chinese leadership from implementing strategies that would just make it a little more awkward on the global stage. If this were to happen to China, I heartily doubt it,” Erzati said.

Jessica Mao and Olivia Li contributed to this report.