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Any alternatives to the greenback at the moment?


2 September 2020

The yuan isn’t going to unseat the U.S. dollar anytime soon — but the Chinese currency’s rising prominence has been seen in global reserves as well as international trade. Much has been said about the U.S. dollar losing its dominance as the world’s reserve currency, as it weakened sharply in recent weeks. Still, analysts rejected the idea, saying there are no viable alternatives to the greenback at the moment. Its two closest competitors — the euro and the Chinese yuan — have their shortcomings, they said. However, the Chinese yuan is set to gain more prominence, and indeed its global usage has gradually gone up owing to the country’s growing economic influence, analysts pointed out.

Factors such as the increasingly heated tech war between the U.S. and China, as well as Beijing’s growing influence by way of its Belt and Road initiative, are also crucial in the yuan’s reach for dominance, said Sven Schubert, senior investment strategist at Europe-based Vontobel Asset Management. The currency is now the sixth most used currency in international payments, and is used to settle about 20% of China’s trade. The share of the RMB in global reserves has also crept up — from 1% in 2016 to around 2% currently, according to data from the International Monetary Fund.

The Chinese currency has been strengthening in recent weeks too. The onshore yuan traded at its strongest level in nearly 16 months on Tuesday — at 6.8239 per dollar, according to Reuters. The offshore yuan was at 6.8236, a high since July 2019. Around 50% of global trade contracts are still quoted in the U.S. dollar, despite the country accounting for only about 12% of global trade, Schubert said, citing an IMF study this year. Economic importance is not the only determining factor of whether a currency can hold sway, Schubert said, adding that the battle for technological supremacy is also key. Washington has come down hard on Chinese tech companies recently — from sanctions on phone maker Huawei, to executive orders against short video-sharing app TikTok and messaging app WeChat. The tech duel has also led to a splitting of the internet – the Chinese-focused internet versus the American-centric one.

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