In recent months, a frenzy on social media ensued about the de-dollarization of the global economy. Despite projections that China will undermine the United States of America as the world’s largest economy by the decade’s end, it is still far from asserting itself as a global power with a big stick. While the United States and China jostle for dominance, other factors in global trade paint a different picture. One stark illustration is that the Swiss Franc is used more frequently than the Chinese Yuan in global trade. The US dollar is not going anywhere soon, and the US will not sit back and let its dominance crumble.
The Chinese Yuan (RMB) has often been taunted as a potential replacement for the US dollar. However, a closer examination reveals that it is primarily countries like Russia and Iran, burdened with heavy sanctions and seeking ways to bypass them, that are pushing for such a shift. Saudi Arabia has also expressed interest in using the Yuan to settle its oil sales to China, which is understandable given that China is its largest oil buyer. Yet, the Yuan still lacks the universal trust needed to form the bedrock of global trade and transactions.
The Chinese Yuan, unlike currencies of many major economies, is not freely floated in the market. Instead, it’s subject to strict management by the Chinese Communist Party (CCP). This management is driven mainly by the Party’s desire to support China’s export-oriented economic model. By maintaining a carefully calibrated value of the Yuan, the CCP ensures that Chinese goods remain competitively priced in international markets. For instance, artificially keeping the Yuan’s value lower makes Chinese exports cheaper for foreign buyers, providing an advantage to Chinese manufacturers.
Conversely, when the Yuan is too weak, and there’s a need to combat inflation or stabilize the domestic economy, the CCP can intervene to adjust its value. Moreover, this rigorous control also serves as a preventive measure against excessive capital outflows, as a fully open market might incentivize many Chinese investors to divert their funds internationally, seeking better returns or hedging against domestic risks. This tight control, while beneficial for China’s economic strategies are a huge point of contention in international trade discussions.
Furthermore, the Chinese government has been known to intervene in the foreign exchange market to maintain a stable exchange rate for the Yuan, leading to accusations of currency manipulation. The CCP’s control on the RMB has also been a cause for concern for foreign investors, as sudden policy changes or economic downturns could result in significant fluctuations in the currency’s value. The lack of transparency in the Chinese financial system has also contributed to doubts about the Yuan’s capability as a global reserve currency. Therefore, it is unlikely that the Yuan will gain the necessary trust and acceptance to replace the US dollar as the world’s reserve currency, without significant reforms and increased openness.
In recent months, reports have suggested that Kenya is abandoning the use of the US dollar. However, this is not accurate. On the 22nd of March 2023, a video was published showing the Kenyan president, Dr. William Ruto, issuing a warning about the US dollar. This video was taken out of context. President Ruto indicated that the demand for the greenback would soon wane, suggesting that those holding US dollars would soon face losses. His comments were particularly timely, given that the local currency, the Kenyan Shilling (KES), was experiencing a significant decline. The backdrop for this warning was a US dollar shortage in the country. This shortage was exacerbated by traders and banks hoarding US dollars, leading to inflated demand. A primary cause for this US dollar demand was the need for imports, especially oil and petroleum products. President Ruto’s comments were made while the Kenyan government had just finished negotiations on a government-to-government deal with the UAE and Saudi Aramco to supply Kenya with petroleum products on a 6-month credit line. This arrangement was significant, as oil imports typically cost Kenya up to $500 million a month. The anticipated decline in US dollar demand meant that speculators and hoarders, who previously profited from the high demand for US dollars, would face losses. This deal and the opening up of the interbank FX market by the Central Bank of Kenya (CBK) was expected to curtail market manipulations that weakened the shilling, inflated the cost of imports, and perpetuated an artificial US dollar shortage instigated by unscrupulous individuals. However, it’s important to note that Kenya would still need to settle its oil bill in USD after six months. Recently, a press release dated 26th September 2023 from the Cabinet Secretary of the Treasury, Professor Njuguna Ndungu, confirmed the first tranche of payments totaling $228.8 million had been made. Despite this deal, the Kenyan shilling did not halt its decline, and it continues to lose value, and its currently sitting at an all-time low against the US dollar.
There seems to be a well-coordinated campaign, potentially led by state actors, to discredit the US dollar and promote alternatives through social media, particularly in the global south. Platforms like Tik-Tok increasingly becoming populated with this type of content, which has taken on a life of its own.
In conclusion, the de-dollarization frenzy is largely unfounded, given the US dollar is deeply entrenchment in global finance, the vast reserves held by nations, and the unparalleled stability it offers. The greenback will remain the world’s reserve currency for the foreseeable future. While there are efforts to replace it, the trust that underpins the global economy is still largely in favor of the US dollar. Therefore, the resilience of the US dollar should not be underestimated, and efforts to undermine its dominance are unlikely to succeed.