Dollar and yuan: the rivalry reaches a new technological level

A cause for U.S. concern is already the fact that China is the largest trading partner for more than 120 countries worldwide. The Chinese yuan accounts for 53% of the total volume of cross-border receipts and payments in China’s foreign economic activity, whereas five years ago this figure was 40%. As China continues to shift with its trading partners to settlements in yuan, the dollar will lose its significance as a means of settlement in international trade.

Until now, official representatives of U.S. financial institutions have not seen threats in the internationalization of the Chinese yuan. Confidence in the stability of the U.S. currency as the key global financial asset, on the one hand, was based on the United States’ unshakable control over the institutions that manage global finance. On the other hand, the Chinese government itself restrained the growth of the yuan’s international use for reasons of national security.

China’s model of economic growth is based on investment in the industrial sector of the economy and curbs excessive speculation in the stock market. China’s reluctance to broadly open its domestic financial market to inflows of foreign capital also results in the yuan’s limited convertibility and, as a consequence, its relatively low attractiveness to foreign investors.

Meanwhile, as modern digital technologies develop, the institutional aspect of dominance in global finance may gradually give way to the technological one. In fact, the configuration of tomorrow’s world currency will to a large extent depend on the winner of the current technological race.

It should be taken into account that the volume of dollar issuance is tied to an increase in the size of U.S. debt. The volume of yuan issuance, however, is oriented toward growth in investment in the industrial sector of the Chinese economy.

Meanwhile, both sides actively use modern digital technologies to strengthen the attractiveness of their own currency for the global community, without departing from the principles of the dominant growth model.

On September 24, the Board of Governors of the Federal Reserve System initiated a public discussion of issues of regulatory and legal oversight of payment stablecoin issuers in accordance with the GENIUS Act. This concerns issuers’ obligations to fully back their stablecoins with short-term Treasury bills and other high-quality liquid assets denominated in dollars. In addition, potential issuers will be required to adopt standard capital requirements to minimize credit and operational risks associated with the issuance of payment stablecoins, as well as risk-management standards, to provide a business plan, financial statements, and a number of other documents. Thus, investments in stablecoins are subject to requirements similar to those applied to the collateralization of traditional bank asset operations.

In turn, at the end of September China for the first time initiated testing of cross-border transfers in digital yuan with the aim of optimizing settlements and expanding its international use. Thus, the Shanghai branches of the Industrial and Commercial Bank of China and the China Construction Bank ensured the first transfers to their Hong Kong subsidiaries in the amount of hundreds of millions of digital yuan at the instruction of Ant International. The transactions were completed in a matter of seconds, whereas large cross-border transfers through traditional channels usually take several days.

If China succeeds in creating a cross-border payments mechanism that is not controlled by the United States and is invulnerable to sanctions, American payment systems may lose their dominant positions in the global monetary system. In turn, this will lower the status of the dollar as the key global currency.

China has already offered the world a digital currency with zero transaction costs. Unlike the dollar, this currency is backed by China’s real industrial potential rather than by U.S. debt obligations.

However, equalization of the positions of the dollar and the yuan in the system of international settlements will finally occur only when the advantages of zero transaction costs associated with the use of the digital yuan exceed the motivation to earn income from holding dollar-denominated assets.

Author: Doctor of Economics, Professor of the Department of World Economy and World Finance, Financial University under the Government of the Russian Federation Aleksei Vladimirovich Kuznetsov.