US does not want victory of China as Yuan to become global currency. Things began to concern US that USD is having tough time in today’s world as more and more countries are looking forward to using their own local currency to do trades and along with that, some currency like China’s Yuan is trying to take over.
USD stood strong in past even when they were having tough times no matter what they had to do, but USD did not fall. Is it even possible for China to take over when everyone is looking for CBDC (central bank digital currency)?
Current USD position
Currently USD is standing strong and even stronger than past 20 years. This means that US is back on track? But there’s a catch and you need to see it.
The concerning thing to US is inflation and they are looking for soft landing so that their power stays and does not affect their economy, thing is it will. If you don’t know how inflation of 2022-23 could affect US, then read this: https://hninstructing.com/what-happens-in-soft-landing-is-risk-free/
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Everyone knows that anything is valued on its supply and demand. As something’s supply is high then its demand or value will be low because its available in market and supply is low then demand will be high because it’s not available and will cause people to buy it at higher price. Now inflation is getting low, but interest rates are still high, Fed has to lower interest rates and print lots of money because if they don’t do that then it will affect US citizens lifestyle as people will fall behind. Printing lot of dollars will mean that there is supply then its price will get low.
Even US dollar is standing strong, it does not mean that it always will. Small currencies will affect USD. For example, India began its UPI system and 13 nations have adopted that payment system and more nations are looking forward to it.
What does US do with having power over world?
US has power to control most of trades of world as they all use USD for trading. This gives huge advantage to US as it can stop any trade of any country if they want. And this is what US does.
Recently, US did put sanctions on Russia and froze its $300B in forex reserve which was hurtful to country as they had to find new payment to trade. And they began trades in their own local currency as Russia and India do trade in Rubel and Rupee. US putting sanctions on Russia did not go well because Rubel is now even stronger than it was before war with Ukraine.
US put sanctions on Iran in 2018 and they faced hard time doing trades as most countries did not want to trade with them. Then India came first to trade, and they did it. External link to India and Iran trade: https://mea.gov.in/Portal/ForeignRelation/India-Iran__Aug_2020_.pdf
US has power and whoever does not follow them, they just put sanctions on them. And that nation’s economy will be changed in fortnight as they can’t export or import because they do not have any other payment system. This is what creates fear in nations.
What could this mean to China?
China wants to Yuan become global currency, and this is only possible by replacing US dollars. And China does most of trades in USD. If China ever tries to take over then US will put sanctions on them and it will hurt China’s economy very badly. China has cheap labour and they export so many goods and stopping them from exporting means killing half the nation’s GDP.
But there is one way that any currency can become world’s currency no matter it is China’s or India’s. Matter of fact, India’s rupee is no way closer to becoming it.
How world will be affected?
World would have hard time as China has cheap labour which helps countries to buy goods at cheaper rate, which is huge advantage. If US puts sanctions on China, then China will stop making those goods which will mess up the whole supply chain. In todays’ world, its said that China is most of supply chain and that is correct.
This gives huge advantage to China as more and more countries continue to trade with China as helping them to become bigger economy.
If US puts sanctions, then there will no goods at such cheaper rate or China and we might even see a huge economic slowdown all over the world and in US too. Because of sanctions on Russia by US, Americans are paying more than 200% of their electricity bills. And we can image what will happen if Sanction were to put on China. US government did not care about its citizens during time of Russia then why they would when its for China.
China holds more than $3 trillion USD in forex reserves and puts (introduces) $1 trillion USD each year in US stock market. That is more than $4 trillion USD each year and it helps US to grow its economy as only US can print USD and they can print it later if they use current forex reserves of countries. This is huge advantage to US. $4 trillion dollars from GDP will be gone and that is more than 20%. After sanctions on China, they will have to switch from China to India to manufacture goods with such cheaper rates. Because after China, India has cheaper labour market. And that transition would not be easy, it can take anywhere from 3 months to 6 months that is 2 quarters.
Will CBDC solve this problem?
Central Bank Digital Currency (CBDC) is digital money so it means that any country can program or reprogram their money accordingly they want. If they can reprogram it, then how can other nation trust on them as they won’t do that? So CBDC can not be either trusted. CBDC won’t solve the problem. Then how China can take over US?
How China or any nation can take over US?
It is quite clear that any country can not say or do anything to win currency war with US directly. They have to do things indirectly. For China to take over, they have to manage somehow nations to do trade in Yuan. If countries find that deal interesting then they would do trade with China in Yuan because they were already buying from China, now China only changed payment method. This thing can be done by country who wants that its currency to become global currency. But China can not just take over like that. There’s a catch.
China has to do something more for victory.
Any nation would accept a currency as default for trade when they know that currency is stable. If Yuan wants to take over USD, then it has to be stable and do as its said above. If Yuan is not stable currency, then it makes other nations afraid that their money is in danger, and they want surety as China won’t print Yuan unlimited.
How can Yuan become stable currency?
Each nation has its own currency, and they can print as much money as they want, so this is what scares other nations while adopting that currency for international trades. It is not stable. So, they need surety, they get it when that currency is pegged by some assets.
They can only use certain asset that is gold. They can’t use diamonds because their price is manipulated by companies to make extra profit. If nation has more gold reserves, then it would seem like stable currency. This is how US became global currency; 1 ounce of gold can be redeemed for $35. So, use USD as they will keep its printing limited.
So, China has to increase its gold reserve and do agreement with counties to do trade in Yuan. And that is what China is doing. And this is big move.
On other hand, US is using its gold reserve to get money for debt relief.
Even India is increasing its gold reserves.
So, is it possible for China to win currency war US? Yes, but any war means it will tough and there will be consequences that world has to be ready for it.