SCMP Editorial

Editorial | China has to accept US dollar remains dominant for now

However, in the longer term, Beijing must internationalise the yuan and continue with financial reforms if the currency is to gain greater acceptance for global trade

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The US financial dominance will not end any time soon. Photo: Shutterstock

SCMP Editorial

Published: 8:48pm, 1 Sep 2020Updated: 10:01pm, 1 Sep 2020

When it comes to the dominance of the US dollar in the global economy, China faces a near-term and a longer-term challenge. Given Washington’s increasing belligerence, Beijing is right to take precautions. But since US financial dominance will not end any time soon, rising to the challenge by increasing the international profile and usage of the yuan in trade and investment must remain a longer-term mission. Both challenges – now and in the future – are closely related, but must not be conflated. Recent measures taken by Washington have concentrated minds in Beijing. Among these are sanctions – over the introduction of the national security law in Hong Kong and alleged mistreatment of Uygurs in Xinjiang – against mainland and Hong Kong officials such as Chief Executive Carrie Lam Cheng Yuet-ngor.

But it appears the so-called nuclear option – kicking China out of the international Swift payment and transfer system – has been way overblown. A positive sign has been the latest progress made over implementing the so-called phase one of the bilateral trade deal between the two countries. Despite a threat from US President Donald Trump that he may not be interested in talking to China any more, top trade negotiators on both sides – Vice-Premier Liu He and US Treasury Steven Mnuchin and Trade Representative Robert Lighthizer – have been pushing phase one forward. This means in the short term, China will continue to purchase large quantities of agricultural products from the US, a move that will please American farmers, a core support base for Trump in the November election.

The “nuclear option” is not even an option for the Trump White House any more, as denying the Chinese access to Swift would mean they have no means of paying for American farm products. Longer term, though, China must internationalise and liberalise the yuan and continue with financial reforms, if the currency is to have a fighting chance of gaining greater acceptance for global trade and investment against the dominance of the US dollar.

But reforms – easing capital account convertibility, liberalising the exchange rate regime and promoting the yuan as an international reserve currency – will take time. Beijing is right to make progress at a pace and manner of its choosing. Ultimately, though, the internationalisation of the yuan is a function of trade and diplomacy, not a unilateral decision by China. Its popularity simply depends on attracting enough counterparties who want to use the yuan to trade. In the meantime, though, China will have to carefully manage relations with the United States to make sure the global economic and financial environment does not turn overtly hostile and make China’s domestic reforms even more challenging.