Chinese digital currency threatens the dominance of the U.S. dollar

While the global market is seeing a massive increase in the use of cryptocurrency brought about by the new highs reached by the price of Bitcoin and excitement for upcoming new cryptocurrency technology, another big developing trend is believed to make these just a sideshow.

The rapid digitalization of the Renminbi, the official currency of China, is believed to be a threat to the dominance of the dollar as the world’s leading reserve currency. The process, together with other macroeconomic and political factors, could make all this not just an ambitious claim but a reality.

In the long run, the Renminbi might be considered the main rival to the US currency.

The Beginning of China Digital Currency

Just a year ago, Beijing introduced a digital currency in four cities that gave commercial banks the ability to conduct internal tests of converting cash to digital money, account balance checks, and payments.

The program grew and was done in 28 major cities in China in August 2020. An aim for broader circulation of digital money gave birth to plans of testing the currency in additional major cities, including Beijing and Shanghai, this 2021.

This kind of planning and initiative is expected to make the process of evaluating the Renminbi at a global scale.

Chinese Currency on the Rise

Only after satisfying two conditions can currencies be more prized as reserve assets.

The first condition is being stable, liquid, and widely used in international transactions. The second condition is that the currency should be backed by a country that has important security links with another state.

The development of China in the past years put it in a very good position of satisfying these requirements, especially that it has maintained policy stability over the years. After all, China accounted for 16% of global output in 2019, and the Renminbi represented just above 2% of global reserves as of the second quarter of 2020.

 

Image courtesy of CGTN/YouTube Screenshot

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