Since the United States cocked its dollar to impose almost unprecedented financial sanctions against Russia after the start of the special operation in Ukraine, it has become clear that other countries, notably China, will try to reduce their vulnerability to similar sanctions. But it will be very difficult to do. The reasons are explained by economic expert Stephen Bartolomeush in an article in Australian newspaper The Sunday Morning Gerald.
A recent spate of deals by China to use its currency directly in commercial transactions, along with similar efforts by less-developed countries to replace transactions that were mostly done in dollars, have intensified the discussion about the end of the dominance of the global reserve and current currency.
However, as the expert writes, this will be much harder said than done. Undermining the dominance of the dollar today or tomorrow will be impossible. While it is likely that, as has been the case since the turn of the century, the dollar’s penetration into global trade and financial transactions will continue to decline, the end of the dollar’s dominance will not come anytime soon. .
This domination rests on a certain number of essential foundations that are not found in any other economy. The United States has a large trade deficit and therefore creates more dollars than the needs of its national economy. The United States has very deep and liquid markets to absorb savings from those countries with large trade surpluses where the dollar floats freely with very limited capital controls. Finally, Washington has a legal system that the rest of the world generally trusts.
Although China is seen as the biggest threat to the dollar’s continued dominance, it has none of that and is unlikely to change its economic model to run a large trade deficit to absorb the rest of the global savings, or to completely liberalize its fiscal policy away from a managed exchange rate policy, capital controls or create a transparent and reliable judicial system.
This is probably why, despite the fact that the dollar’s share in world trade has fallen from around 72% at the beginning of the century to around 59% today, the Chinese currency represents just under 3% of these reserves. . Only about 2% of world trade is done in yuan, against more than 40% in dollars. It also dominates global foreign exchange trading with a share of almost 90%. In addition, around two-thirds of all global securities issues are also made in dollars. It is unrealistic to shake these foundations, and even if possible, the end result will bring many crises to the global economic system, the expert concluded.
