In a world where the US dollar dominates, China must strike back by enhancing the yuan's international appeal



Although China has the second-largest economy in the world, its currency still lacks heft in the global marketplace. This leaves China vulnerable because the United States could easily limit Chinese access to the US financial system, if it wished. Such access remains crucial in a world where the US dollar is the dominant currency for global payments.


Beijing needs to step up the pace of yuan internationalisation if it is to start to address that vulnerability.

US Vice-President Mike Pence reiterated last week that Washington is "not seeking to contain China's development" but he also repeated the message of President Donald Trump's national security strategy, that "the United States now recognises China as a strategic and economic rival".

In truth, the White House could easily utilise existing US legislation to restrict Chinese access to the US financial system. And the more reliant the Chinese economy is on the US dollar, the more vulnerable China is to such legislative measures.


Encouraging greater international use of the yuan would help mitigate, though not eliminate, such risks, but that is proving to be a slow process.

The renminbi is now "the fifth most active currency for global payments by value", according to the Belgium-based financial messaging system Swift (the Society for Worldwide Interbank Financial Telecommunication). That might not sound too bad but the devil is in the details.

In September, 1.95 per cent of all global payments through the Swift system were made in yuan, while 40.51 per cent were made in US dollars. Even more revealingly, the cross-border payments shares of the euro, the British pound and the Japanese yen were 32.77, 6.97 and 3.72 per cent respectively.

This data shows not only how much further the yuan has to go just to catch up with the euro, let alone the greenback, but also how dominant the US dollar is in the payment chain.

The global financial system rests on the bedrock of the US dollar and access to the US financial system. That gives Washington a lot of leverage to pursue its own objectives.

Further evidence of the US dollar's hegemony can be found in a survey by the Bank for International Settlements (BIS).


"The US dollar retained its dominant currency status, being on one side of 88 per cent of all trades," the BIS reported in the Triennial Central Bank Survey of April foreign exchange turnover, published last month. As for the yuan, it "remained the eighth most traded currency, with a share of 4.3 per cent, ranking just after the Swiss franc".

In other words, the US can make life very difficult for countries with which it has differences just by restricting access to its capital markets.

Specifically, the White House would only have to invoke the 1977 International Emergency Economic Powers Act. The legislation "allows the US president to declare a national emergency and deploy a range of economic tools to respond to unusual or extraordinary threats", wrote Paola Subacchi, professor of international economics at the University of London's Queen Mary Global Policy Institute, in an article for Project Syndicate.

Once the act is invoked, the US president may use the authority in Section 203 of the act to "investigate, regulate, or prohibit foreign exchange transactions"; "take specified actions relating to property in which a foreign country or person has interest"; or freeze assets, according to a March paper from the US Congressional Research Service.

The economic powers act formed the basis for Trump's executive order in 2018 to reinstate sanctions on Iran, but that order went further than merely seeking to penalise Iran directly. It also provided for the US to impose sanctions on foreign entities that continue to do business with Iran, in contravention of Trump's executive order.

Consequently, on November 2, 2018, US Treasury Secretary Steven Mnuchin said Washington had advised Swift that "it must disconnect any Iranian financial institutions that we designate as soon as technologically feasible to avoid sanctions exposure".

On November 5, without referring to the US sanctions, Swift nevertheless announced that it was suspending some Iranian banks' access to its messaging system "in the interest of the stability and integrity of the wider global financial system".

The US dollar's hegemony and the International Emergency Economic Powers Act give Washington a powerful advantage in the global arena. That's a reality that China cannot afford to ignore. Beijing should redouble its efforts to enhance the yuan's international appeal - and swiftly.

Neal Kimberley is a commentator on macroeconomics and financial markets

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.


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