While China is making formidable strides towards potentially becoming the world’s largest economy by 2030, a shift in currency dominance isn’t necessarily part of that equation.
Akin to the historic transition when the United States overtook Great Britain, the greenback isn’t likely to abdicate its throne as the globe’s principal currency anytime soon, even with the rising dragon.
The unfaltering greenback in the global economy
Indeed, the future may hold a partial de-dollarization, according to recent analyses by JPMorgan’s strategists. However, the shift won’t catapult the yuan, or any other competitor, to replace the dollar’s influence.
Instead, any change will be marked by a measured, gradual transformation rather than a seismic economic upheaval.
The investment giant’s strategists argue that while the United States had outperformed Great Britain in economic terms in the late 19th century, it wasn’t until after World War II that the US dollar started to eclipse the British pound as the principal reserve currency.
Drawing parallels to this historical trend, the dollar’s supremacy could be upheld until the latter half of the 21st century, even if China’s economy leaps ahead.
Notably, for the yuan to gain ground, China would need to relax its capital controls, a scenario that appears unlikely for now. Marginal de-dollarization could be propelled by diminishing trust in the greenback or global developments boosting the credibility of other currencies.
However, any de-dollarization won’t signal a swift swing towards the yuan or any other currency.
Fluctuating Forex reserves and currency supremacy
International Monetary Fund data cited by JPMorgan highlights that the dollar’s share of foreign currency reserves dipped from 73% in 2001 to 58% in 2022, while the yuan’s share rose by about 2.5% during the same period.
Yet, JPMorgan views these numbers as inconclusive evidence of de-dollarization, as fluctuating exchange rates and portfolio reallocations also influence the figures.
According to the bank, China is the lone rival with the desire and potential to challenge the dollar and the US economy over the long run.
Nevertheless, considering the United States’ standing – underpinned by its economy, technological prowess, demographics, and geographical advantages – it remains an uphill task.
Stephen Jen, CEO of Eurizon SLJ, postulates a “tripolar” currency system where the dollar shares its dominance with two others. He envisions the euro and the yuan sharing a nearly equal presence, aligning with the economic might of their respective blocs.
Navigating the Sino-US relationship
In the political arena, China and the US have shown progress in stabilizing their strained bilateral ties.
Chinese President Xi Jinping made the strongest statement yet of Beijing’s willingness to negotiate a truce with Washington during a recent meeting with US Secretary of State Antony Blinken, the first to visit Beijing since 2018.
Xi emphasized the importance of managing Sino-US relations responsibly, indicating that the outcomes could impact the future of humanity.
Blinken echoed this sentiment, stating that both nations recognized the need to stabilize their relationship and establish improved communication lines to prevent competition from escalating into conflict.
Despite the diplomatic advancements, uncertainties persist. Tensions continue to simmer over China’s military maneuvers near Taiwan and its refusal to denounce Russia’s invasion of Ukraine.
Nonetheless, a prudent approach to the evolving relationship between the two superpowers might herald a new chapter in the global economic and political landscape.
As the future unfolds, the currency landscape is bound to transform. But, for now, the greenback continues to hold its fort, regardless of the shifting sands of global economics.