1/2/2024 0 Comments Ecny wechat pay morningpost4 China has steadily grown to become the world’s second-largest trading partner after the United States. Two months into his presidency, Joe Biden declared that he sees stiff competition from China in the future. This often grants the United States some political leverage, as it is able to impose unilateral sanctions against countries for its own political reasons. 3 Today, one leg of most of the trade transactions in the world passes through a U.S. The dollar makes up almost 60 percent of foreign currency reserves. One way the United States has been able to maintain its powerful economic and geopolitical status is through the dollar’s hegemony in the global financial system. Around the world, the dollar is used as a store of value, a unit of account, and a medium of exchange. dollar has remained central to the global monetary system. 2 While government-issued paper money started its journey in China, for more than seventy years, the U.S. The Song dynasty was the first to introduce paper money to the world, and today, China is also at the global forefront in developing digital currencies. Ideas and technologies imagined and created in China have shaped the world today. This paper examines the reasons for China’s past efforts at currency dominance and explores ways in which the country can use its CBDC to further internationalize its digital yuan. In the last decade, some of China’s major geopolitical efforts have set the stage for its CBDC launch.Īs China continues to use its foreign policy and technological capabilities to grow its influence in the global financial system, the launch of the digital yuan could be a significant step forward in this direction. China’s geopolitics will play a key role here. China’s ability to successfully promote its currency using CBDCs will depend heavily on the country’s ability to relax capital controls and maintain the world’s trust in its institutions. It will also have to incentivize other countries to adopt its digital currency. In order to challenge the dollar, China will have to build the payments infrastructure required to facilitate the use of its digital yuan. Considering China’s growing economy and influence over the world, the paper argues that China’s CBDC launch could bring a period of momentous change in the global financial system. This paper analyses the way the launch of China’s CBDCs could greatly enhance its currency internationalization prospects. The best way to simultaneously do both would be to introduce a new payment rail like CBDCs. In order to challenge the dollar’s hegemony and internationalize its currency, China will have to move away not just from the dollar but also from the payment rails dominated by the dollar. Of all the countries, China finds itself in a dominant position to gain from this transition. dollar’s hegemony has been challenged by economies like those of the European Union (EU), Russia, and China. In an increasingly multipolar world, this outdated, decades-old system of the dollar as the apex currency and the United States’ position of power that allows it to pursue its own geopolitical interests has become outdated. Thus, via the dollar’s dominance and its geopolitical muscle, the United States is positioned to maintain a tight grip on the world’s financial system. 1 Once a country is cut off from SWIFT’s network, it becomes extremely difficult for it to trade with the rest of the world. These sanctions seriously hinder trade and damage the economies of the countries affected by them, as was the case with Iran, which lost $150 billion worth of revenue as a result of U.S. For example, the Society for Worldwide Interbank Financial Telecommunications (SWIFT)-the largest cross-border payment clearinghouse in the world-has to comply with and implement unilateral U.S. The United States has a tight grip on the world’s payment rails, especially in the case of cross-border transactions. The first part of the paper focuses on the dollar’s dominance in the global financial system and the privileges the United States accrues as a result of the dollar being the world reserve currency. This paper highlights ways in which China can use its digital yuan to internationalize the renminbi (RMB) and gradually chip away at the hegemony of the dollar. While several countries are developing their digital currencies, China is well positioned to take the lead with the digital yuan. Instead, they are a complete replacement for currency notes. Unlike money held in credit cards and mobile wallets, CBDCs are not a mere representation of physical money stored elsewhere. In a way, they are the digital version of cash their value is guaranteed by a central bank. Central bank digital currencies (CBDC) are digital tokens issued by central banks.
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