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Several Chinese economists, academics predict end of dollar dominance, not only via digital yuan

us china currency war

This week there have been multiple articles in the Chinese press about the potential end of the U.S. dollar’s dominance and China’s central bank digital currency (CBDC). One described threats of sanctions as making SWIFT and the dollar lose credibility. Another envisions the digital yuan (or DCEP) as creating a moat to protect the Chinese economy from the U.S.’ expansionist monetary policy.

Qian Jun, the chief economist of China’s ICBC International bank, a division of the world’s largest company, outlined how the 2008 crisis increased dependence on the liquidity of the U.S. dollar. And the recent additional monetary easing would add to that. But it’s not without risks of unwinding.

He believes if there were a Libra or digital dollar, it would further increase dependence on the dollar. But “if DCEP can seize this historical opportunity and combine it with the ‘Belt and Road’ construction and global value chain reconstruction, it will promote the internationalization of the RMB and the ‘network effect’,” wrote Jun.

He described this as creating a “financial moat” to protect the Chinese economy from the impact of U.S. dollar liquidity.

SWIFT’s use for sanctions could trigger de-dollarization?

Liu Xiaochun, from the Shanghai Finance Institute, used a different metaphor for the U.S., a wall. The former President of China Zheshang Bank (and Communist Party representative) lambasted the U.S. government as “irrational” and warned of the risk of Hong Kong being shut out of SWIFT. The Bank of China has since expanded this concern to mainland China.

Xiaochun’s opinions were strongly worded. “One thing is certain, the current U.S. government is making SWIFT and the dollar lose credibility,” he wrote. “A wall really keeps others out of the wall, so why not enclose yourself in the wall? The United States may have begun the process of de-dollarization of the world.”

Plans to sidestep SWIFT

He said the road to bypassing SWIFT and the U.S. dollar clearing system is not an overnight one. We interpret one suggestion as rather than making individual payments, a bank can pool transactions and where possible internally settle receipts and payment for importers and exporters and only do external net transactions. 

The former bank president suggested expanding this model to a network of banks. But a foreign payment leg is still required, even if the amount is less. Not mentioned was how anti money laundering procedures would work in this scenario for the foreign counterparty bank.

For the net international payments, he proposed relationships with individual foreign banks who were willing to cooperate. The suggestion is that an alternative messaging system would be created with banks in the Middle East, Western and Eastern Europe and ASEAN countries. Unsurprisingly, he put forward blockchain and digital currencies as potential technologies, but he was referring to dollars and digital currency purely for clearing as opposed to the digital yuan. 

“This problem can only be solved by the gradual de-dollarization of the world. The more bullying the United States acts, the faster the pace of de-dollarization will be.”

Suggests de-dollarization even if it’s not renminbi

He had several suggestions to internationalize the renminbi (RMB), including denominating transactions in RMB rather than dollars; creating more renminbi financing entities outside of China; and ensuring that the Chinese CIPS RMB cross border payment system accepts messages other than SWIFT. 

For Belt and Road projects, he said RMB should be the currency of choice, but if that’s not possible, a non dollar currency should be a preference. 

Is the DCEP purely domestic?

In contrast, another academic took the diplomacy path. Chen Bo of the Central University of Finance and Economics responded to news about G7 discussions of a CBDC in which China is excluded. Writing in English in the government-backed Global Times, he claimed that international hostility towards China’s digital currency plans was misplaced as the currency is primarily for domestic retail use. “The digitalization upgrade of the financial system has been misinterpreted as a challenge to the U.S. dollar. This has put pressure on the digital currency,” said Bo.

He encouraged China to participate in global currency discussions proactively.

It’s unclear whether this flurry of press articles, including others not mentioned here, is a coincidence or an orchestrated effort. The recent discussions between China and the EU in which only China mentioned cooperation about digital currencies, leaves the suspicion this is a deliberate increase in chatter.