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Santana F. King
Jan 13, 20204 min read

Chinese Monetary Ambitions: the Yuan's assault on the Dollar's dominance



Since the Bretton Woods Conference in 1944, it has been a top priority for the U.S. to keep their dollar at the top of the global monetary hierarchy (Link to previous article: Dollar's Dominance).

The U.S. interprets any threat to the dollar’s hegemony as a threat to its national security; the supremacy of the U.S. is entangled with the supremacy of the dollar. If the current monetary order were to be challenged, the U.S. would be in tremendous danger. It would be far more difficult for the U.S. to carry its enormous national debt; hence making it more challenging to fund its massive military and domestic social programs, U.S. citizens would have to pay higher prices, and the government would lose diplomatic tools (e.g. financial sanctions, robust foreign aid, etc.).


The U.S. has used a range of diplomatic tactics to maintain their monetary hegemony: i.e. the use of Force, coercive diplomacy, and collective security


U.S. Efforts to Maintain the Dollar:


Since the demand for the U.S. dollar is highly contingent on the demand for oil, the U.S. has taken dramatic actions to ensure their currency remains the means of exchange for oil. The Petro-dollar system has been relatively stable since President Nixon and Secretary Kissinger introduced it onto the trading stage, and with the growth of foreign state’s populations and wealth, the demand for oil and the dollar have grown in harmony. When states have threatened this dollar/oil dynamic, the U.S. has used various forms of coercive diplomacy and force to impede or eliminate those threats.


The U.S. has gone to war with states and regimes that have threated the Petro-dollar—past, and present. In the past, the U.S. has used kinetic force towards middle eastern regimes that moved from the dollar-for-oil dynamic--to establish U.S. friendly governments (e.g. Iraq). The U.S. government has also allowed partner-states, like Saudi Arabia, to act freely in the region without reprisal or Chastisement, despite scrutiny from its citizens and allies.


China's international Ambitions:


China has begun to challenge the U.S.’s role as the leading global hyperpower; recently, they have nipped at the heels of the Dollars hegemony while also taking advantage of its weaknesses.


China’s currency, the yuan, was recently introduced to the IMF’s basket of reserve currencies; although, on its own, this does not pose too much of a threat to the dollar’s position, but this paired with China’s recent geopolitical moves points to their intended aim: they want to reap the benefits of exorbitant privilege. China has begun to amass a massive amount of debt, and with its aging workforce’s wages rising, monetary hegemony would reprieve their economy from danger.


Demand for the Yuan:

China has been making serious geopolitical maneuvers that increase the demand for the yuan and threaten the dollar’s. China has made bilateral trade-deals with U.S. adversaries like Russia and Iran to trade their oil in Yuans: they aim to create the Petro-Yuan. This poses a significant danger to the dollar because China has already surpassed the U.S. as the largest consumer of oil. In addition, China has begun purchasing and stockpiling gold reserves and their bilateral trade deals establish exchange rates between the participants respective currencies, omitting the use of dollars.


China is in the process of establishing a Chinese dominated trading route: they are putting in place the infrastructure in various states to create a “new silk road”. Currently, the Chinese are a nation of cheap exports, they are not consumers. Though, if China, who is already the world’s largest market, continues to expand their economic clout (i.e. a Chinese controlled trading route), the result will be an increase in the demand to purchase more Yuans.



U.S. suppressing Chinese ambition:

The U.S. has taken measures to assure the Chinese Yuan does not defeat the dollar any time soon. The trade war between the U.S. and China can also be seen as a currency war. Through coercive diplomacy (i.e. sanction and tariffs), the U.S. is attempting to weaken the Chinese exports reliant economy—which has brought results. Hindering Chinese exports will hurt the Chinese economy and hurt Chinese ambitions. The Trump administration and the Chinese government have began negotiating a set exchange-rate between the Yuan and Dollar.


The U.S. has also placed draconian sanctions on Russia and Iran’s oil, in order to suppress their global distribution. This policy hurts both China and the state being sanctioned because it restricts access to U.S. markets and U.S. allies’ market—their allies follow their lead because of fear of U.S. reprisal. By suppressing oil exports of Chinese-partnered states (i.e. Russia, Iran, and Venezuela) the U.S. torpedoes China’s ambitions for a Petro-Yuan, an oil-backed currency.


Another U.S. policy that is intended to combat China’s monetary ambition is its earnest military presence in the South Asian Sea. The South Asian Sea is a region that China must incorporate into their “new silk road”. China has begun posturing with the U.S. Navy; they have already artificially created island-Navy-bases to challenge the U.S. Navy presence. The U.S.’s reaction has been the increase of its regional military presence, causing China to become more hesitant with their trading route related infrastructure projects.


The U.S. has dominated maritime trade in the South Asian Sea for decades. Now, China holds expansionist ambitions and if the U.S. aims to mitigate China’s economic expansion, to save the dollar’s hegemony, it must prevent a China-controlled trading route in the most populated region of the world.


Conclusion:

Nations like China are beginning to threaten the Dollar’s hegemony, which the U.S. views as an indirect threat to their international supremacy. The U.S. had begun to retaliate to China’s ambition to have their Yuan as the globe’s paramount currency.


Sources:

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