China's new digital yuan could compete as a reserve currency and undermine the financial dominance of the U.S., the WSJ said in an article translated by Inosmi.
China is giving the U.S. a worthy rivalry. It recently launched the digital yuan, backed by new disruptive technology. This poses a threat to the dominance of the U.S. dollar and to U.S. hegemony. U.S. political leadership must pay close attention to what is happening and respond by creating a strengthened form of the dollar that will serve the national interest.
The dollar has had its strongest position since 2002. It has appreciated more than 10 percent in one year against most major currencies, including the yuan. But the U.S. authorities must get the dollar's strength right. Output in America is declining, though not as fast as that of our leading trading partners. The Federal Reserve is belatedly raising rates to slow inflation, but high prices will come at a high price.
The weakness of China's currency is a derivative of that country's economic woes and adversity. Production and productivity figures are well below official statistics. Companies are cutting costs, exports are falling. People are aging much faster than they are getting richer. And the weakness of the yuan is also the result of China's political choices. In recent years, Beijing has tried to persuade foreign investors to include the renminbi in their assets, but such appeals have had limited success. Increased capital controls and unreliable rule of law make the renminbi an unattractive alternative to the U.S. dollar.
And this is where cryptocurrency comes in and changes everything. Don't be fooled into looking at the thousands of different cryptocurrencies that masquerade as money in some form of circulation. Many of these schemes are fraudulent, and most go nowhere. Cryptocurrency is a misnomer. It is not mysterious and it is not money. It is software. It is also an important technological breakthrough that gives hope and bodes ill for the U.S.-led global financial system. In the hands of powerful sovereign countries like China, the new software provides an effective opportunity to take the yuan into the big leagues.
That is why the Chinese central bank's new digital currency, e-CNY, launched in April 2020, is so important and has such significant implications. China's e-CNY will be the technological basis for most large transfers between the People's Bank of China, financial firms and foreign organizations. If a foreign company wants to maintain access to the huge Chinese market, it will be forced to use this digital currency and its wholesale payment network when doing business. When fully applied, e-CNY will also become the predominant form of retail settlement, and over time most personal financial transactions will be conducted through it. China's planners will have a powerful tool for tracking transactions and enforcing government directives.
China is expanding its sphere of influence in Asia, Russia and the Middle East. Its leadership sees e-CNY as a system of international payments and currency parallel to the Western one. If a bipolar world were to emerge due to China's rise and America's fatigue, which would be a great imprudence, the dollar's dominant position could be undermined. The gap between the world's two largest economies will not be limited to imports and investments, wealth and power. It could well lead to the strengthening of an alternative reserve currency.