Over the past decade, countries in the West and the East took a turn towards preferring autarkical economic and political policymaking, signifying a fundamental break from the previously global attitude they exhibited.

A growing group of observers and commentators has been forecasting the end of the US dollar as the world’s reserve currency. Also, many of the pundits claim the Chinese yuan would be the one to usurp the coveted position of the world’s reserve currency.

The argument is built on two fundamental premises: 1) An apparent waning influence of the US economy on a world stage in terms of favourable political and economic pacts as well as a decrease in the number of goods and services traded on a global scale using the US dollar as its medium.

2) An increase in the ambit of Chinese economic and political influence among its neighbouring States and other developing countries predominantly through the Belt and Road initiative.

A closer examination of the veracity of the first claim regarding the waning influence of the US on the world stage, both economically and politically, shows it is largely misguided. One need only look at how the Russo-Ukraine War prompted the US to be Ukraine’s key ally and supporter, representing the West along with its European allies. Meanwhile, China has largely stayed out of the conflict, choosing to maintain a neutral position, fearing rebuke from its Western counterparts. Moreover, as a significant portion of the world trades with other currencies, it is natural as economies expand, they trade among each other, leading to a decline in the total share of trade taking place with the US dollar.

Still the favourite

However, it would be wrong to interpret this as an inherent weakness of the US dollar as it continues to enjoy greater preference for investment than any other country. The year 2022-23 is an example of how investment funds rushed to the US shores after the Federal Reserve raised rates at short intervals, signalling high investor confidence in US treasuries and the US dollar. During the period, most central banks adjusted interest rates in line with the Federal Reserve, indicating the significance of US monetary policymaking.

Over the latter half of the past decade, multiple headlines stated the end of the petrodollar was near and the time of the petroyuan had begun. China has indeed tried to augment its influence in geopolitics by striking economic and political deals with multiple allies and investment deals with developing countries starved of funds via the Belt and Road initiative.

However, this plan has been riddled with poor economic management and exploitative pacts with partner countries such as Sri Lanka, unable to pay back loans to China, and many others reporting feeling pressured under a phenomenon now come to be known as “Debt-trap diplomacy”. This does not bode well for China as this mode of influence is highly volatile and unsustainable, souring diplomatic efforts in the long run. Additionally, domestic Chinese demand suffered since they implemented the zero COVID policy, which placed excessive strain on the Chinese economy along with real-estate collapse. The Chinese yuan is closely monitored, and those holding it cannot manoeuvre freely, a key hurdle preventing it from becoming the world’s reserve currency. Since the expansion of the American shale oil revolution and the push for American energy independence, traditional oil-producing allies such as Saudi Arabia tried to seek alliances with countries such as China to, in turn, reduce their exposure to US demand for their oil. However, it must be noted the Saudi Arabian government and wealth funds prefer US treasury bills and American high-skilled technology imports such as Artificial Intelligence.

It is difficult to envision a world where China, with its heavily restricted markets and low-quality exports, poses a better investment prospect and trade partner than the US.

Many critical roadblocks lie ahead in countries such as China, which seek to displace the US dollar as the world’s reserve currency. However, it is possible over time, these obstacles will be overcome and a new or group of currencies will assume greater global importance. Such a currency would have to be freely tradeable with a stable economy behind it, ensuring those who utilise it can do so without being concerned about its inherent value or stability or the country issuing it.

(Anand Srinivasan is a consultant. Sashwath Swaminathan is a research assistant at Aionion Investment Services)

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