- Can China Dethrone the US Dollar as Global Reserve
by On the US dollar as reserve currency, that is a tough thing to break especially for China since the yuan is not freely convertible. China has renminbi and yuan; one they peg to the dollar and the other is circulated in China. Try converting USD to yuan in Paypal for example? The option is not there. Payments from the west to china sellers by Paypal (for example) are only in dollars.
It is a complex subject since China is the only foreign nation with a direct link into the US Treasury for purchase of US debt instruments, bypassing the Fed’s crooked relationship with its crooked primary dealers. This is done to manage China’s global trade relationships via the value of its currency which is somewhat pegged to the dollar (even if China and Trump claim otherwise) thus evading Federal Reserve gamesmanship. That’s why Trump messing with China is so dangerous, even if China has few options right now.
As a result of this ‘trade war’ China has let the yuan slide versus the USD which is a warning to Trump, specifically Mnuchin, popularly known as one of the most slippery dealers (IndyMAC and One West) to ever walk the earth (and China knows that). China is hoping that a lower yuan will offset tariffs just as the US has ‘weaponized’ the dollar and has imposed sanctions and tariffs on China. Because the sums are so vast with China holding so much US debt, and because China depends on exports to the west, China is somewhat boxed in.
So far China has been happy building ghost cities and high-quality infrastructure instead of blowing up their monetary reserves on the battlefield in useless wars as others do. If China wanted to blow up their trillion in US dollar reserves on the battlefield that would be very serious for the west indeed and so far, the Chinese leadership — and for that matter China’s people — have expressed no interest in doing so.
China could reduce its ties to the US dollar (USD) by making the yuan freely convertible, noting the IMF’s inclusion of the yuan in the SDR as a first step. Next, China could reduce its US foreign debt holdings but the question is where that money will go… where is a nation to park billions upon billions or even one+ trillion in surplus if not in the US dollar? That’s still the great quandary for China.