Few things are more certain in life than death, taxes, and profound statements by President Joe Biden. But the use of the dollar as the world’s reserve currency has also been a fact of life in the global financial system since the end of World War II.
However, China seeks to end the primacy of the dollar and remake the global system in its own autocratic image with its own currency — the renminbi.
The question consuming the discussions of omniscient politicians and academics alike is whether the renminbi or, indeed, any other currency, can be a viable alternative to the U.S. dollar.
The dollar became the world’s leading reserve currency due to the sheer size of the United States economy, the importance of its economy in international trade, the size and transparency of its financial markets, the convertibility of its currency, and the use of the dollar as a currency peg by other nations.
Even though China’s economy has (by some measures) approached the size of that of the United States, the renminbi has never been the currency of choice for most international transactions — constituting less than 3% of global trade — as compared to the 87% of global trade that is carried out with U.S. dollars.
There are a number of factors hindering the widespread adoption of the renminbi in international transactions, even though China now boasts the world’s second largest economy.
Central banks have been unwilling to stock up on the renminbi and thus make China’s currency more widely available for international transactions due in part to the arbitrary and capricious nature of China’s dominion over its own economy, particularly its heavy-handed use of capital controls, preventing money from leaving the country.
China has been notoriously reluctant to permit capital outflows because these funds can be and have been used to finance its own economic development.
Indeed, more than 98% of all the stocks in the Chinese stock market at the time of its collapse in 2016 were owned by Chinese citizens because they had no other (non-Chinese) investment alternatives due to the government’s restrictions.
These very same capital controls concern foreign investors who fear that they will not be able to repatriate their profits.
Their concerns are amplified further by the porous legal protections given to foreign investments in China.
The country does not have a neutral judicial system nor a tradition of rule of law but instead a legal system that is shaped more by contemporary political considerations (e.g., hewing the CCP’s line) than settled legal precedents.
Because the judicial system is in many ways an extension of the CCP, the law is subject to change arbitrarily and without prior warning or comment from the public.
The attractiveness of China and, indeed, its currency, to foreign investors has also taken a beating in recent years as the CCP has sought to reassert its authority over China’s biggest tech companies including Alibaba, Tencent, and Baidu.
At the core of this effort to tighten control over these companies is the question of who will control the data that has been collected on hundreds of millions of users by these companies.
The CCP regards the control of data as of paramount importance as it continues to push ahead with developing AI technologies that it hopes will enable it to supplant the technological dominance of the United States.
The CCP’s willingness to rein in China’s leading companies has not been lost on foreign enterprises who have to decide whether the potential risks of doing business in China or using the renminbi are worth it.
China’s red-hot growth rate has averaged over 9% per year for the past four decades and helped to lift 800 million people out of poverty.
However, China’s economy has run into a brick wall in the past few years with the end of the cheap labor supply that arose from the movement of hundreds of millions of citizens from the countryside to the cities.
At the same time, other nations have become more determined to reshore their own industries; a trend that may gradually reduce both China’s role as the world’s leading manufacturer and the demand for Chinese-manufactured products.
This concern about China’s economy and the soundness of the renminbi is compounded by the staggering size of China’s public and private debt which, Forbes reports, is equivalent to nearly $52 trillion, an amount that is almost three times the size of China’s gross domestic product.
China is now seeing a reversal of many of the trends enabling it to become a global power such as a declining growth rate and rising manufacturing and labor costs — all of which mitigate against a wider use of the renminbi.
China is also exerting additional restrictions over the most dynamic actors in its economy.
It's also engaging in suffocating capital controls; measures discouraging foreign investors.
Needless to say, China has not been reluctant to trumpet its intent to bury the United States.
In sum, the rancor of its daily pronouncements as well as the actions of the CCP have done little to enhance China’s appeal to global investors or cause them to want to increase substantially their use of the renminbi for their transactional needs.
Jefferson Hane Weaver is a transactional lawyer residing in Florida. He received his undergraduate degree in Economics and Political Science from the University of North Carolina and his J.D. and Ph.D. in International Relations from Columbia University. Dr. Weaver is the author of numerous books on varied compelling subjects. Read more of his reports — Here.
© 2023 Newsmax. All rights reserved.