The U.S. dollar has been the most powerful currency in the world for eighty years. This role as the world’s reserve currency provides the United States unprecedented control over the global economy, allowing it to destabilize a nation’s economy within two weeks, and as a result, it has even ruled giant powers like Russia and China.
China and Russia have a master plan to kill the dollar’s dominance in the world, and if you look at the past 10 years’ data, you’ll see that it’s working quite well. In 1999, the dollar held 71 % of the market share among global reserve currencies, but in the past 10 years, it has dropped to less than 59 %. In the next 10 years, if China and Russia’s plan succeeds, a new reserve currency could emerge.
The issue is thus, what are China and Russia’s grand plans to end the dollar’s global dominance? How do they want to dethrone the United States as the global superpower, and what problems will China and Russia confront in the currency wars of the world?
To comprehend this China-Russia approach, one must first comprehend why the US dollar is so strong and why it has a near-monopoly position among the world’s reserve currencies.
First, the Dollar served as the reserve currency of the trust, whereby in 1994 the US said if you had a Dollar, we would exchange its value for Gold at $35 per ounce, allowing two countries that may or may not trust each other to trade without difficulty. Thus, when Indonesia received $1 million from Pakistan, even if they did not trust Pakistan, they knew that the $1 million could be exchanged for gold with the US.
Today, 10,000 Pakistani Rupees could buy one gramme of gold, but if Pakistan prints more money and declares that 20,000 Pakistani Rupees will buy one gramme of gold next week, the entire value of trade with Indonesia would collapse. Furthermore, if Indonesia wants to use Pakistani Rupees, but other countries do not trust Pakistan’s economy, then those rupees could not be used for trade.
However, the identical transaction occurred in dollars. The United States guaranteed the value of dollars with gold, so you could trade with any country using the US dollar and be confident that it could be used to trade with any other country to purchase any other commodity. In 1971, Richard Nixon came out of nowhere and ended this gold standard, allowing everyone to trade with any currency they wished.
Why, therefore, did practically all nations continue to use the dollar? Because the dollar was the only currency that could be used to purchase oil from the Saudis, and because in 1945 US President Franklin D. Roosevelt made an agreement of the century with the Saudi King in which the US guaranteed the security of Saudi Arabia in exchange for the Saudi King agreeing to sell oil in US dollars if you wanted to purchase oil you needed US dollars. This is the second reason for the dollar’s dominance, the ability to purchase oil.
The third superpower through the quick network, and how can a shifting network use US cash deposited in US bank accounts?
Consequently, if an Indian trader wished to do business with a Sri Lankan merchant, this system would include an Indian trader, an Indian bank, an American bank 1, an American bank 2, a foreign bank, and a foreign trader. Both Indian and Sri Lankan banks will have a dollar account in an American bank, so if Reliance wants to import 1 crore rupees worth of minerals from Sri Lanka, they would give the Indian Bank 1 crore rupees and ask them to pay the same amount in dollars to the Sri- Lankan trader account. Knowing that the Indian bank has 1 crore rupees in its Indian account, it would send a message to its dollar account in an American bank. This is how the swift network operates, and just like Indian and Sri Lanka banks, more than 200 countries and 10,000 banks trade with the US dollar and have their forex reserves with American banks. The catch, so we’re told, is that if a country has 100 billion dollars in forex but only spends 30 billion dollars on imports and exports, it would have a surplus of 70 billion dollars.
So, just as we avoid keeping a lot of savings and investing in stocks, these countries invest their excess foreign reserves in US Treasury bonds. Just like our Government Bonds, this is a mega Bond whereby countries are lending billions of excess dollars to the US and expect a return after maturity. This is where the unfair advantage of the US dollar comes into play.
This is so much money that it exceeds the combined GDP of France, India, and Russia. In other words, three superpowers rely on the US dollar for trade power to purchase oil, and the US has invested its entire foreign exchange reserve in its economy with seven trillion dollars in bonds.
And we all know that China is furious with the United States for supporting Taiwan, and Russia is already the most sanctioned country, so now Russia is unable to use its dollar account in the United States for trade, and most Russian companies have also been removed from the swift network. As a result of these two superpowers being bullied by the United States, they joined forces to bring down the United States itself.
This is where China and Russia began their game plan, thus the issue is how China and Russia can jointly destroy the dollar’s supremacy. What specifically is their strategy? In this scenario, leverage is one of the most potent geopolitical instruments, and Russia is one of the world’s top oil and gas producers, so even if Saudi Arabia and other nations were selling oil and gas in dollars, Russia was able to profit.
Russia punished its unfriendly nations by requiring them to purchase Russian oil in rubles. As a result, the majority of European nations were forced to purchase rubles, despite their hatred of Vladimir Putin. This meant that, in the payment network diagram, instead of US banks having dollar reserves, all the unfriendly nations that purchased oil from Russia had to keep their money in the Russian Central Bank.
And if you look at the graph, the US Treasury’s holdings have decreased from $150 billion in 2013 to only $3.98 billion in 2021; this is the leverage that Russia has over Europe. Similarly, China has leverage with the belt and road initiative countries. If you recall, China’s belt and road initiative is a three trillion-dollar project in which the Chinese have given out overly generous loans to countries all over the world. Under the bri initiative, 165 countries owe a total of 385 billion dollars to China, and many of these countries have taken on so much debt from China that they are in danger of defaulting. Now, do you understand that Pakistan owes China 24.7 billion dollars in debt, given its current economic problems, a 1% discount on a 24.7-billion-dollar loan? Since the inception of the bri programme, China has provided 14% of its total loan in its currency without relying on the dollar. This is a major concern for Pakistan.
Pakistan’s central bank has already consented to conduct bilateral commerce with China in Yuan as of 2018, and other nations such as Myanmar, Cambodia, and Russia are doing the same. In addition, China is now the largest trade partner with 25 bri-participating countries, so the leverage of trade for China is extremely strong. Therefore, with the combination of trade and debt, China could pressure these countries to use the yuan over the dollar, allowing it to build the strings of 165 nations and significantly increase the circulation of the yuan over time.
The challenge here is how China and Russia might convince wealthy nations such as England and South Korea to abandon the dollar, given that the majority of these nations are impoverished.
Well, to begin with, Russia is firmly backing China and has already made the Chinese Yuan a reserve currency, so this is a huge step. Other countries have something called a bilateral currency exchange arrangement, which India is pursuing very strategically with its friend nations.
The issue, therefore, becomes, what is a bilateral currency swap agreement? How does it truly function in international trade?
Let’s attempt to comprehend this with an example: suppose China and the United Kingdom sign a 5-year, $1 million bilateral currency swap deal. This means that China will sell a million dollars worth of yuan to the United Kingdom and the United Kingdom will sell a million dollars worth of pawns to China. After conversion, China will give the United Kingdom 6.842 million yuan and the United Kingdom will give China 847,250 pounds at an agreed-upon exchange rate of 8.07. For the next five years, the Chinese Central Bank can sell these pounds and obtain U.S. dollars, or it can lend these funds to domestic banks and
Similarly, the bank of England can do the same with the yuan. Therefore, if an English businessman wanted to buy a million euros worth of goods from China, he would have to pay in pounds to the English bank, which would then convert the amount into dollars, transfer the dollars to the US bank account of China, and then the Chinese bank would transfer the converted number of yuan to the Chinese businessman. This would incur a significant amount of fees for both parties.
1) Both nations can remove their currency risk.
2) Both nations may use this currency to get dollars if necessary and
3) Businesses in both nations can conduct trade at a lower cost, therefore the commercial connection between the two nations improves over time.
4) Finally, and most critically, the dependence on the US currency diminishes substantially.
Beijing has inked more than 3 trillion years worth of bilateral currency exchange agreements with more than 40 nations, including 400 billion Yuan bilateral agreements with Hong Kong and South Korea. 350 billion yuan with the Bank of England and the European Central Bank, respectively. 300 billion Yuan with Singapore and 150 billion Yuan with Russia, and the icing on the cake is that since China is the world’s largest manufacturer, with almost 20% of the world’s manufacturing taking place in China, they could leverage this to force companies to pay in yuan rather than the US dollar.
And guess what, Saudi Arabia is now considered to be selling oil in yuan, which means that if Saudi Arabia starts selling oil in yuan, many countries would rush to buy yuan, and just as we saw with excess Forex being invested in US bonds, the excess yuan would then be invested in Chinese bonds, making the Chinese economy more and more powerful. This is how China and Russia are slowly building a currency strategy to overthrow the Reserve currency thrown from the US dollar.
Now, this technique seems to be rather simple and easy; what does this imply? That the yuan will overturn the dollar is unlikely, and these are the problems that the yuan will confront in the current currency market. China is infamous for its death-trap diplomacy and invasion of Taiwan, while Russia has been surrounded by the west.
The US has even accused China of currency manipulation, and the world is well aware that China is not as transparent as the US, which will discourage the adoption of the Yuan over US dollars.
Lastly, it is obvious that the United States dislikes the rise of the Chinese Yuan, and with the amount of money and military power that the United States possesses, it is not difficult for them to push against the Chinese Yuan. The key to this will be the digital dollar and its war against the digital yuan.