How China’s digital currency will thwart US dollar trap and help the world
- The digital renminbi is a sovereign currency fully backed by the state, does not require a bank account and has full oversight by Chinese banking authorities
- Developing countries will embrace the convenience of China’s digital payment systems, which have great poverty-relief potential for the world’s unbanked poor
The US dollar displaced the British pound as the world’s leading reserve currency at the beginning of the last century. Since the Bretton Woods Agreement in 1944 linked world currencies to the dollar, it has reigned supreme.
As China opened up and became integrated with the world trading and financial systems, it has been caught in a “dollar trap”, having to convert excess national savings into secure, internationally-convertible US treasuries.
Over the years, the US has enjoyed the dollar’s exorbitant privilege of almost unlimited money-printing, or “quantitative easing” in central bank parlance. As former US president Richard Nixon’s Treasury secretary John Connally famously said, “The dollar is our currency, but it’s your problem.”
Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, pointed out in 2011 that the world was living in the shadow of China’s economic dominance. More national currencies were moving in tandem with the renminbi instead of the dollar. Nevertheless, the dollar is being increasingly weaponised to impose economic sanctions on China.
However, owing to America’s dwindling domestic savings and a gaping current account deficit, Stephen Roach has warned that the dollar’s “exorbitant privilege” is about to end.
