Dollar Hegemony

EMEL AKAN is a senior reporter for The Epoch Times in Washington, D.C. Previously she worked in the financial sector as an investment banker at JPMorgan. Emel Akan

Is the US Dollar Under Attack?

China and Russia seek to wean the global economy off the greenback

Potential efforts to assist Russia to sell its oil and dodge Western sanctions have prompted fears about the survival of the global economic order. Some wonder if China and Russia’s continuous de-dollarization drive will expand, putting the U.S. dollar’s hegemony in the global financial system in jeopardy.

For more than a decade, China and Russia have been trying to diversify away from the U.S. dollar mainly to shield their economies from Western sanctions and claim global economic leadership.

The U.S. dollar has been the world’s primary reserve currency since World War II. The greenback accounted for 59 percent of worldwide central bank foreign exchange reserves in 2021. The U.S. dollar is also the most extensively used currency for international trade and investments.

China has a large amount of dollar reserves and does not allow its currency, the yuan, to be freely traded on foreign exchange markets. The yuan, also known as the renminbi (RMB), accounts for only 2.7 percent of global foreign exchange reserves.

While Beijing relies substantially on the dollar, it has been trying to promote the yuan in its bilateral trade deals. China pushes for the usage of yuan in its Belt and Road Initiative (BRI), a massive trade and infrastructure project.

Beijing also introduced yuan-priced oil contracts in 2018 to make it possible for crude exporting countries to sell their oil in the Chinese currency.

But the U.S. dollar’s dominance in the oil market is holding firm. Close to 80 percent of global oil sales are still priced in dollars.

“China theoretically has the ability to snap its fingers tomorrow and provide a solid counterweight to the U.S. dollar,” according to Christopher Balding, an expert on the Chinese economy.

But Beijing won’t allow that, and the reason is very simple, Balding says.

“To be a global currency, there has to be a global price,” he said. “There has to be global flows of the currency. China will not let that happen. They will not allow a global price to be set with free flows of the RMB. So, until China takes that political decision to allow that, there’s really nothing to discuss.”

Before the invasion of Ukraine, Moscow spent years attempting to shield itself from the effects of sanctions. After annexing Crimea in 2014, Russia dramatically curtailed its use of U.S. dollars.

In 2019, Russia and China inked a deal to broaden the use of the yuan and the ruble in their bilateral trade. The same year, Russia’s central bank increased the yuan’s share in its foreign exchange reserves to 15 percent from 5 percent.

The Western sanctions on Russia are giving Beijing a unique opportunity to boost the yuan’s status in international markets. Chinese officials hope that working with Russia will help them build a yuan-based financial infrastructure.

Russian crude is being sold at a significant discount to global benchmarks. And Chinese oil refiners are quietly snapping up cheap crude from Russia. Some Chinese buyers are reportedly given the option to pay in yuan.

And it’s not just Russia that wants to embrace the yuan. Saudi Arabia, whose relationship with Washington has cooled since President Joe Biden took office, is reportedly considering accepting the yuan instead of dollars for oil sales to China.

“It’s just another event or stress test that’s proving that globalization is over,” according to Michael O’Sullivan, author of the book “The Levelling: What’s Next After Globalization.”

People are getting excited about this because they perceive it as a moment when the West’s financial dominance may come to an end, which is unlikely to happen, O’Sullivan said.

“It’s very hard to see how the Chinese are really going to deepen the usage of their currency, particularly at a time when they’re alienating the Western world,” he said.

Economist and Insight columnist Milton Ezrati echoes similar views. He believes that the de-dollarization movement could weaken U.S. global leadership in the long term.

But the question, he says, is how far it can go.

The U.S. dollar is no longer what it was decades ago, Ezrati concedes, but it remains the best option and is unlikely to lose its status anytime soon.

Chinese officials hope that working with Russia will help them build a yuan-based financial infrastructure.