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The Digital Yuan is Not a Competitor to the US Dollar

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The upcoming introduction of the Digital yuan in China will not pose a threat to the dominance of the US dollar.

Although the Asian country has already overtaken other countries in building digital payments and innovation infrastructure.

the digital yuan

In an article published by Project Syndicate, Indian economist Eswar Prasad, professor of trade policy at Cornell University and senior fellow at the Brookings Institution, wrote that China’s central bank digital currency (CBDC) “is unlikely to affect the dollar’s status as the world’s dominant reserve currency.”

At the same time, Prasad acknowledged that the digital yuan could “enhance the role of the Chinese currency as international payment currency.” Especially if Beijing is optimizing the token with its “cross-border payment system” (mostly blockchain-based). In addition, he noted that “the country’s government continues to reform financial markets and removes restrictions on capital flows.”

However, according to the expert, any progress made by the digital yuan is likely to be made at the expense of other international fiat currencies, but not the US dollar.

Any global gains made by the yuan as a means of payment and as a reserve currency are largely driven by the Euro and the British Pound Sterling. Even when the IMF added the yuan to the four existing currencies in the SDR basket and gave them a 10.9% weight, it was mainly the euro, pound, and Japanese yen that lost, not the dollar.

The professor added that no matter how technological the digital yuan is, foreign investors will remain wary of the idea of large investments in the yuan, given how tightly the People’s Central Bank of China regulates its currency.

And no matter what the United States has experienced domestically over the past few years, on an international financial scale, markets continue to believe in the dollar overwhelmingly.

The economic dominance of the United States developed and liquid capital markets, and a still robust institutional structure mean that the US dollar still has no serious competitor as the world’s leading reserve currency.

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