Dollar vs Yuan renminbi, will the

monetary hegemony change?

INDEX

1. INTRODUCTION: WHAT IS THE MONETARY HEGEMONY?

2. DOLLAR: MAIN RESERVE CURRENCY ON AN INTERNATIONAL LEVEL

2.1. Background

2.2. Dollar hegemony

2.3. Determining factors for the Hegemony of the Dollar

3. DOLLAR vs YUAN
3.1 What´s up?
3.2 Reasons behind Renminbi´s increased popularity
3.3. Dollar Hegemony Is Under Fire From China’s Rapid Growth Recovery (Sachs)
3.4. The reasons different to the ones already mentioned are the following
3.5. Contrary opinions
4. CONCLUSION
5. BIBLIOGRAPHY
 1. INTRODUCTION: WHAT IS THE MONETARY HEGEMONY?

Monetary hegemony is an economic and political concept in which a single state has decisive
influence over the functions of the international monetary system. A monetary hegemony
would need:
- accessibility to international credits,
- foreign exchange markets
- the management of balance of payments problems in which the hegemon operates
under no balance of payments constraint.
- the direct (and absolute) power to enforce a unit of account in which economic
calculations are made in the world economy.
If a currency aspires to hegemony, it must be the most used currency as an international
reserve. In addition, it must be widely accepted as a way of payment in international
transactions and must be a unit of account in the international capital markets and in the most
important foreign exchange markets.

2. DOLLAR: MAIN RESERVE CURRENCY ON AN INTERNATIONAL LEVEL

2.1. Background
Currently, we find what is called the Hegemony of the US Dollar. This is the dominant
presence of the US dollar in the global economy.
The term describes a geopolitical phenomenon that began in the 20th century, in which the
US dollar became the main reserve and reference currency at the international level.
At the beginning of the 20th century, the British pound was the most important international
way of payment and also the reserve currency in the capitalist world.
Historically, there was the so-called “Gold Standard system”, which basically consisted of
establishing the value of a country's currency in relation to the amount of gold it had. The
Gold Standard was the basis of the financial system between 1870 and 1914. Central banks
issued currency based on their gold reserves. After the First World War, the countries did not
have enough gold to support the number of banknotes that they had to print for the
reconstruction of the countries. The period between 1918 and 1939 was referred to as the
period “between the wars”. In 1922 there was the Geneva Conference, in which they wanted
to solve the problem of rising inflation and the uncontrolled increase in the money supply. In
that conference, they established the system of Gold-Exchange Standard, which consists in
that the Pound (which was the determining currency) would be fixed to gold, and the rest of
the currencies were fixed to the British pound. It was a system that did not last long, from
1925 to 1931 more or less, due to British weakness as it had different costs based on the war
it was having and because of the Crack of 29 (the great depression) that affected and
weakened the British economy quite a bit.
From there, the position of the British pound as an international reserve currency declined
and it was gradually replaced by the United States dollar.
But what does reserve currency mean? It is that currency that is used in large quantities by
many governments and institutions as part of their international reserves.
Each country has its international reserves, and they function as an economic indicator,
showing the resources that a country has available to make purchases abroad, transactions in
which only strong currencies are acceptable as a means of payment. Furthermore, the reserve
currency tends to be the currency through which the prices of goods traded on the global
market such as oil, gold, etc. are set.

2.2. Dollar hegemony

The dollar is the hegemonic currency because it is the most widely used currency in the
world.
In 2019, the dollar was used in 87.6% of transactions worldwide, and accounted for about
60% of global reserves. Following the dollar, the Euro, in 2019, was the second most
powerful currency with a 20% representation worldwide.
This is why most countries use the dollar as a reference currency to issue their debt so that the
US does not suffer from devaluations of national currencies.
For example, if a country needs money, it is normal to issue a debt bond. That is, a piece of
paper that says "if you lend me X amount of money I will pay you back in 10 years together
with a percentage of interest". So far so good. Let's imagine that we lend 3000 Argentine
pesos to the Argentine State. Right now that we are in 2021, those 3000 Argentine pesos are
equivalent to 30 US dollars, but... maybe in the year 2030 the Argentine currency will have
devalued even more. In other words, by the day Argentina gives us back the 3000 pesos, they
will be of almost no use to us. Therefore, domestic investors say: "I will lend you the money,
but that debt will be denominated in U.S. Dollars''. In other words, I lend you 300 dollars and
you pay me back 300 dollars in order to protect us from your possible devaluations.
But we are not only talking about Argentina, most countries choose the dollar as a reference
currency to issue their debt. And that is why almost all the oil in the world is bought in US
Dollars, and almost all the public debt that is issued as well. That explains why 60% of the
foreign reserve currencies held by central banks are in dollars. There are more than 2 billion
dollars in circulation in the world and more than half of these are outside the United States.
There is no international law that says the dollar has to be the reference currency, but
nevertheless, almost everyone relies on this currency for international trade.
What does the US gain from having its currency circulating all over the world?
Well, it depends, if you are a company or a private US citizen, it is completely irrelevant to
you. Now, for the US government, the hegemony of the dollar is like a gift from heaven.
The worst thing that can happen to a country is to have hyperinflation. That means having an
increase of the prices from one day to another. But why do hyperinflations arise?
Well, in most cases, this phenomenon occurs when a central bank starts printing banknotes in
an abundant way. So why is there a currency devalue when we print too much?
To understand this, we have to think that the currency of a country is one more product that is
governed by the same principles that govern oil, oranges or telephones: SUPPLY AND
DEMAND.

For example, the demand for the Venezuelan Bolivar is quite limited, only Venezuelans use it,
so if the Venezuelan central bank prints a lot of Bolivars, or in other words, increases the
money supply, it is normal for the price to fall, i.e. the currency devalues. However, the
demand for the U.S. dollar continues to grow. Everyone on the planet uses it, which means
that the Federal Reserve has an enormous margin to print banknotes without the dollar
devaluing.
The truth is that this hegemony of the dollar allows the U.S. to get into debt much more
comfortably than any other country.
As we said at the beginning, 60% of the foreign
currency reserves held by central banks around the
world are in US dollars. But what about the
remaining 40%?
The second most used currency is the euro,
followed by the Japanese yen. But they are not the
only ones. Many central banks have reserves
denominated in Swiss francs or Australian dollars.
Although these are rare currencies, they are
known to be very stable.
So, if the important thing about a currency is that it is stable: why isn't the Swiss franc used
as much as the dollar?
The answer is that there are far fewer Swiss francs on the market. Switzerland has 8.5 million
inhabitants. In contrast, the US has 300 million, which means that the Swiss National Bank
needs far fewer banknotes. On the other hand, the U.S. is the world's largest market. That
means that thousands of companies from all over the world sell their products in this country.
For example, imagine you are a Mexican company and you sell a cell phone in the USA, how
do you get paid? with dollars, and what do you do with the dollars? you change them to your
local currency. And who keeps your money? The Mexican bank where you made the
exchange.
The more the U.S. trades with the world, the more dollars circulate around the planet. In other
words, the dollar is a stable, abundant currency, supported by the largest economy on the
planet.
Until decades ago, no other currency competed with it, but the world is changing. This is a
subject that we will discuss later.
2.3. Determining factors for the Hegemony of the Dollar

1) BRETTON WOODS AGREEMENTS

The Bretton Woods agreements are all the resolutions of the monetary and financial
conference of the United Nations, held in Bretton Woods (New Hampshire, United States),
between July 1 and 22, 1944, which established the world economic policies that were in
force until the early 1970s.

It was there that the rules for trade and financial relations between the world's most
industrialized countries were established. Bretton Woods sought to put an end to the
protectionism, which began in 1914, with the First World War.

In the agreements, it was also decided to create the World Bank and the International
Monetary Fund, using the U.S. dollar as the international reference currency.

The degree of U.S. management of the Conference was clear in the determination of quotas
for the member countries of the International Monetary Fund. This issue has been and is
central to the governance of the Fund, because the quota determines voting power and
control.

The main objective of the Bretton Woods system was to implement a New International
Economic Order and to give stability to commercial transactions through an international
monetary system, with a solid and stable exchange rate based on the dominance of the dollar.

To this end, a gold standard was adopted, in which the United States was to maintain the
price of gold at US$35.00 per ounce and was granted the power to exchange dollars for gold
at that price without restrictions or limitations. The other countries should fix the price of
their currencies in relation to it, and if necessary, intervene in the exchange markets in order
to keep exchange rates within a 1% fluctuation band.

2) OIL PRICE QUOTATION IN DOLLARS

This occurred after the 1973 oil crisis. The oil exporting countries (grouped in the
Organization of Petroleum Exporting Countries, OPEC) obtained an important income of
foreign currency in dollars. This money would be partially destined to the development of
their economies, but would also be used for the indebtedness of several Latin American
countries that were under dictatorial regimes (originating the Latin American debt crisis of
the early 1980s). The bulk of these debts were also denominated in dollars.

3) EMERGENCE OF DEREGULATED GLOBAL FINANCIAL TRADE

After the end of the Cold War, most global transactions, including those of the former Soviet
Union, would continue to be based on the U.S. dollar. China, as a global economic power,
became the main creditor of the US, holding a large part of its reserves in US debt bonds. The
inflationary crises in Latin American countries (a consequence of the previous debt crises)
also contributed to the crisis, with Venezuela, Brazil, Argentina and Ecuador standing out.

2.4 GLOBALIZATION: dollar crisis, yuan advance and crypto-currencies

1. DOLLAR CRISIS
The dollar's growing weakness in the wake of the Covid-19 crisis threatens to spell the end of
the greenback's hegemony.

After a cycle of appreciation in recent years, a number of factors are negatively affecting the
dollar's global leadership position to the detriment of other currencies that, for the time being,
are emerging stronger from the pandemic, such as the Chinese yuan.

In the expert's opinion, the measures adopted in the United States encourage consumption,
"and therefore inflation", as opposed to the stimulus plans of China or Europe, rival economic
powers, which are more aimed at "supporting production".

In addition to stimulus, the US Federal Reserve's (Fed) monetary policies, which have been
maintained in a low interest rate environment since the beginning of the pandemic, is another
element of pressure on the greenback.

It consists of letting inflation advance before intervening. Keep in mind that [inflation] erodes
the time value of a currency. For example, with rising prices, a dollar will not allow us to buy
as many goods and services tomorrow as it does today.

In addition to these factors, there is also greater appetite for investment in other geographic
regions.

With regard to Asia, the "spearhead of the fourth industrial revolution", the higher level of
certain interest rates is also attractive to investors, which "favors", according to the expert,
local currencies such as the Chinese yuan.

A recovery in the currencies of commodity-exporting countries cannot be ruled out.

In this scenario, the recovery would be driven by "solid" fundamentals and "disciplined"
economic management while commodity prices have returned to 2016 levels.

2. YUAN ADVANCE 10 REASONS

- China over the past 10 years has recognised the geopolitical merits of attaining
reserve currency status - and this is likely to continue
 - Once again - as after the 1997-98 Asia crisis - international fears that the
Chinese would attempt to seek a competitive advantage through currency
devaluation have been scotched.
- The People's Bank of China (PBOC) has recognised that yuan appreciation
would help control inflation as well as foster a planned shift in economic focus
away from external and towards domestic demand.
- Although at the heart of the Covid-19 outbreak, China is the first major
economy to escape from this year's severe downturn. It will be the only big
country recording economic growth this year.
- China appears to have profited from trade wars with the US, while many
American firms have lost out.
- US and other large asset owners, managers and banks are profiting from China
opening its asset management and bond markets to allow foreigners access to
what is set to become the world's second-biggest capital market.
- Domestic bond market opening runs alongside efforts to increase the yuan's
appeal as a reserve asset.
- Constraints on China's investments abroad have temporarily halted the country's
attempt to make a better return on its foreign assets - one of its strategic aims of
the past decade.
- The digital yuan will be a major advance, especially for trading relations with
Asian partners.

3. CRYPTO-CURRENCIES

Cryptocurrencies are digital currencies that are exchanged online. Unlike money, they do not
have a material representation, so they are stored in digital wallets.

According to an International Monetary Fund (IMF) study, the emergence of digital

currencies and advances in payment systems could alter the significance of traditional drivers
of reserve currencies, and result in the emergence of new reserve currencies. The aforesaid
data on China’s economy must be read along with other recent developments in the People’s
Republic of China. The internationalization of the renminbi has been a strategic goal for
China. Beijing’s efforts culminated in its 2016 inclusion in the IMF’s Special Drawing Rights
basket of currencies. As an extension of its moves to internationalize its currency, Beijing is
pursuing CBDC research aggressively. China is believed to be at an advanced stage in its
retail CBDC research. In April 2020, China piloted a version of its digital renminbi in four
major cities for retail use. China has also joined the central banks of Hong Kong, Thailand
and the UAE to develop a prototype to facilitate real-time cross-border payments using a
CBDC. The adoption of a digital renminbi for cross-border payments may allow China’s
financial system to reduce its reliance on the US dollar, and limit the involvement of foreign
financial institutions as well as the oversight of foreign authorities. Currently, cross-border
payments are costly and time-consuming, due to the involvement of several parties, exposing
parties involved in transactions to credit and settlement risk. If China can leverage its
first-mover advantage to meet the need for a digital currency and build an efficient CBDC
system that can address these pain points in cross-border payments, its CBDC could prove
attractive for international trade. The potential opportunities presented by a digital renminbi
for enhancing China’s influence in global financial markets are supported by measures like
China’s Belt and Road Initiative and bilateral trade relations with countries, especially in the
Southeast Asian region. This region is intricately connected with China through trade and
investment ties, and Beijing will probably use these to drive demand for a digital renminbi.
Some even point out that a digital currency will allow China’s CBDC infrastructure to bypass
US sanctions and also enable users to avoid the scrutiny of the SWIFT system. This may be
relevant for sanctioned countries like Russia, Iran and Venezuela. Of course, this itself may
be a cause of concern.

3. DOLLAR vs YUAN

3.1. What´s up?

China’s light-speed recovery from the pandemic has reignited the perennial debate about how
long the dollar’s 50-year dominance of global markets can persist.

The U.S.’s struggle to control the coronavirus and revive its economy contrasts sharply with
the Asian nation, where growth has roared back. That divergence has bolstered China’s tilt at
dollar hegemony, with investors flocking to onshore assets, trying out the renminbi for trade,
and even giving it another look as a reserve currency.

The world’s second-largest economy is now set to depose the U.S. as the leading engine of
growth in 2028, five years earlier than expected just a year ago after better weathering the
pandemic, the Centre for Economics and Business Research said recently.

Given that China is the second-largest economy and the world’s biggest trading nation, the
renminbi should be used far more extensively than it is. However, Beijing’s determination to
retain capital controls has prevented it from following a conventional path to reserve currency
status. China is still operating restrictions on money flows, so why has the outlook for the
renminbi brightened?

3.2. Reasons behind Renminbi´s increased popularity

China has made progress in setting up a digital renminbi payments system that is
cost-effective and easy to use. The People’s Bank of China is well advanced in preparations
for the digital renminbi, which will initially serve the domestic economy. But the central bank
is also working with its counterparts in Hong Kong, Thailand and the United Arab Emirates,
alongside the Bank for International Settlements, on using a digital ledger of transactions that
is distributed among counterparties. The aim is to harness central banks’ digital currencies to
make multicurrency cross-border payments simpler and cheaper.
China has also made progress on boosting the renminbi’s attractiveness as a store of value,
establishing its credentials as a stable, low-inflation economy even as financial markets worry
that unprecedented fiscal and monetary stimulus will unleash inflation in the US, tarnishing
the dollar. Importantly, central banks and financial institutions that regard the renminbi as a
credible store of value now have more rein to express their view. China has opened its capital
markets more to foreign investors, triggering hefty inflows into stocks and bonds over the last
couple of years. True, China retains capital controls. But a successful rollout of the digital
renminbi, which will be firmly under the control of the PBoC, is likely to make the
Communist party more comfortable with relaxing controls because the authorities will have
full visibility over two-way flows.

Finally, the renminbi’s functions as a unit of account have also increased since the initial bid
to internationalise the renminbi. Trade invoicing in renminbi still has to regain its peak 2015
levels, but in the meantime China has launched renminbi-denominated futures contracts in a
number of commodities, including oil and gold.

Investors have certainly taken notice, pumping $135 billion into Chinese bonds in the 12
months ended Sept. 30, data compiled by Bloomberg show. Equities have also proved
popular, luring $155 billion over the same period.

3.3. Dollar Hegemony Is Under Fire From China’s Rapid Growth Recovery (Sachs)

In the near future, institutions will move away from their dependence on the US dollar,
Jeffrey Sachs said, with multiple currencies including the yuan and euro to be used for
settling international trade, global central bank reserves and fundraising through bond
issuance.

“I believe that we will move from a largely dollar-based settlements system to a

multicurrency settlements system, in which the dollar, euro, and [yuan] are all used for
international settlements,” said the noted American macroeconomist.

3.4. The reasons different to the ones already mentioned are the following

The main reason to expect a de-dollarisation in the monetary order stemmed from America’s
declining share of the global economy, Sachs said. The US now accounts for 15 percent of
the world economy, down from around 21.6 per cent in 1980, according to estimates from the
International Monetary Fund.
This has raised the question of whether the US will continue to have the economic sway
necessary to support the current pervasiveness of dollar use. By comparison, China´s
economy now accounts for around 19.2 percent of the world economy while the European
Union is about 16 per cent.
In addition, the US has undermined the political standing of the dollar’s role by using it to
impose sanctions on countries such as Iran, suspending their access to the US dollar-based
international financial messaging network, Sachs said.
He has previously said that as China and other countries grow more frustrated with the dollar
hegemony, which effectively gives the US authority over the international financial markets,
they may step up efforts to create an alternative payments system to deal with their
international partners.

A third reason to expect the yuan’s role to increase, Sachs argued, was that the dollar-based
international financial system has been characterised by periodic crises. The global debt crisis
in 2008 and the Asian financial crisis in the mid-1990s were down to poor financial
regulation by the US, he added. Desire to avoid these crises are likely to create a tendency
towards currency diversification in settlements over time, he said.

3.5. Contrary opinions

Contrary to Sachs’ projection, many analysts think it will take several decades before the
yuan becomes a key player in the international market, given Beijing’s reluctance to float the
currency and end restrictions on its exchange.

“The renminbi assets are in a way difficult for foreigners [to access] for a number a reasons.
The currency’s internationalisation is stagnating,” said Alicia Garcia-Herrero, chief
Asia-Pacific economist at Natixis. Any future decline in the US dollar’s market share is more
likely to be filled by the euro, the South Korean won – or even the Brazilian real – than the
yuan, because these currencies are easily convertible, she said.

5. CONCLUSION
Those who doubt the renminbi will become a reserve currency will point to the absence of the
rule of law in China, the lack of independent institutions, and the opaque and unpredictable
policymaking of an authoritarian regime. But those who doubt the dollar can remain the
undisputed apex currency only have to point to the recent attacks in the US on the democratic
institutions that are also meant to be an indispensable underpinning of reserve currency
status. China is now striving to capitalise on a reputation for innovation in payments to carve
out a sphere of currency influence, defined not by common interests or political culture but
by shared infrastructure and technical standards. While interests can change, the hard wiring
of digital and economic connectivity is far harder to break once established. And it is China
that enjoys first-mover advantage. Finally, rather than taking the dollar’s place globally, the
yuan might then emerge at best as a reserve currency within an ecosystem of linked nations,
with the dollar remaining the reserve currency for the rest of the world. That would be a win
for yuan internationalization, but not a knock out.
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