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Can China Dethrone US Dollar? Challenges and Initiatives



Although Chinese leaders have not publicly declared an intention to compete with the dollar, the country is strategically strengthening the yuan through local institutions and regional alliances like the Shanghai Cooperation Organization. The objective is clear: to reduce reliance on the dollar, decrease exchange risks, and ensure access to global markets during geopolitical crises.

 

China's multifaceted approach involves boosting the use of the yuan in cross-border trade and investment, all while avoiding an overt challenge to the dollar's global dominance. The strategic goals include lessening reliance on the dollar, reducing exchange risk, and mitigating dollar liquidity shortages. By doing so, Beijing aims to protect itself from vulnerabilities that may arise during geopolitical crises.

 

Despite these objectives, no Chinese leaders have openly stated their intention to compete directly with the dollar. However, as tensions persist, Chinese financial regulators and scholars have expressed concerns about Beijing's vulnerabilities and urged the government to take proactive measures to protect its financial system.

 

Fang Xinghai, the vice chairman of the China Securities Regulatory Commission, issued a warning about the possibility of China being cut off from the US dollar-based global payment system. This scenario, termed "forced financial decoupling," could restrict Chinese groups from using the US dollar for international transactions, similar to the situation faced by Russia after the conflict in Ukraine.

 

This warning comes in the context of proposed US legislation that could punish Chinese entities involved in enforcing Beijing's national security law in Hong Kong. The bill could also penalize banks doing business with these entities, adding another layer of potential financial pressure on China.

 

President Xi Jinping's emphasis on preparing for the worst reflects a broader concern within the Chinese leadership. The fear of international sanctions, especially in the event of a military conflict with the West over Taiwan, has led Xi to advocate for protective measures for China's state-owned financial institutions and businesses.

 

This concern has been amplified by the recent Western sanctions on Russian groups, which have triggered apprehension among Chinese policymakers. The freezing of Russian foreign exchange reserves has been particularly unsettling, prompting Chinese economist Yu Yongding to criticize it as a "blatant breach of trust" and evidence of the United States' "willingness to stop playing by the rules."

 

As tensions persist and geopolitical uncertainties loom, China's efforts to strengthen the yuan and reduce dependence on the dollar will likely continue. However, the road ahead is fraught with challenges, both domestic and international, as Beijing navigates the delicate balance between asserting its economic power and avoiding direct confrontation with the established global currency.

 

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