Chinese Yuan Unlikely to Challenge the U.S. Dollar’s Dominance, Economist Asserts
Economist Benn Steil, serving as the director of International Economics at the Council on Foreign Relations, has recently expressed that the Chinese yuan does not pose a considerable threat to the supremacy of the U.S. dollar. In his opinion piece “The Real Cost of De-Dollarization,” published on the Protect Syndicate website, he clarified that the Chinese renminbi constitutes less than 3% of global reserves and is therefore not a major contender against dollar hegemony.
He further emphasized that rather than competitive alternatives, the actual peril to the dollar’s dominance stems from the U.S. government, referencing recent events such as the federal debt ceiling standoff and the Fitch Ratings downgrade.
Steil commented on the Chinese yuan’s potential as a substitute for the U.S. dollar, stating:
The Chinese renminbi, comprising under 3% of worldwide reserves, does not seriously menace dollar hegemony.
He went on to discuss the various hindrances that keep the renminbi from being a credible store of value, such as China’s declining legal protections, strict capital controls, and an underdeveloped bond market that witnessed a record pullout of $91 billion in 2022. He explained that these factors have contributed to the stalling of the currency’s internationalization.
Steil further noted:
The current scenario does not present a single viable alternative to the dollar’s continuing dominance. Rather, many observers have alluded to the likely shift towards a ‘multi-currency’ system in which the dollar’s role would be significantly reduced.
While some, like Chinese economist Chen Yulu, argue that the Chinese yuan could equal the U.S. dollar, and Nobel laureate Paul Krugman concedes that the dollar’s predominance might not be eternal, there remains doubt that the yuan could ever supplant the dollar. Recent analyses also highlight that the Chinese yuan’s volatility makes efforts towards de-dollarization even more challenging.
Frequently Asked Questions (FAQs) about Chinese yuan
What is the main argument made by economist Benn Steil regarding the Chinese yuan and U.S. dollar?
Benn Steil, an economist and director of International Economics at the Council on Foreign Relations, argues that the Chinese yuan is not a significant threat to the U.S. dollar’s dominance. He explains that the real threat comes from the U.S. government itself, and not from competitive currency alternatives. He cites China’s stringent capital controls, deteriorating legal protections, and underdeveloped bond markets as reasons why the yuan is far from a credible alternative to the dollar.
Who else has commented on the potential rivalry between the Chinese yuan and the U.S. dollar?
Other commentators include Chinese economist Chen Yulu, who believes that the yuan could become on par with the USD, and Nobel laureate Paul Krugman, who thinks the U.S. dollar’s dominance won’t last forever but doubts that the yuan could replace it. Market analysts have also mentioned the yuan’s volatility as an obstacle to de-dollarization efforts.
What factors does Steil identify as hindrances to the Chinese yuan becoming a credible store of value?
Steil identifies China’s deteriorating legal protections, stringent capital controls, and relatively underdeveloped bond markets as factors hindering the yuan’s credibility as a store of value. He also mentions that foreign investors pulled a record $91 billion from these markets in 2022 and that the currency’s internationalization stalled a decade ago.