Strong US Dollar Crushes China’s Dream of Turning Yuan To A Global Currency

A strong dollar is crushing China’s dream of turning the yuan into a global currency to replace a strong dollar, rekindling the age-old question of whether Beijing will cash out of its U.S. Treasury portfolio to back the yuan.

In the past five months, the dollar has risen about 10% against the yuan, breaking the psychological barrier of 7 yuan against the greenback, due to a combination of U.S. monetary tightening and China’s monetary easing.This is a policy mix that favors the flow of capital and products from China to the U.S.

In a sense, this should be a good thing for Beijing. It has helped Chinese exports emerge from a persistent slowdown caused by the lockdown and the bursting of the housing bubble.

“A strong dollar is a double-edged sword for China,” Joseph Trevisani, a senior analyst at foreign exchange trading platform FXStreet, told the International Business Times in an email.

“While it raises the cost of most raw materials, lowers the repatriation of corporate profits, and makes foreign loans more expensive, it also lowers the cost of Chinese products, which is a huge deal for her export-driven economy. benefit.”

The problem is that the dollar has been rising against the currencies of other regional economies Exports to the United States, such as Korea and Japan. As a result, the devaluation of the renminbi has little impact on China’s exports to the US, which are slightly higher these days than last April.

At the same time, Trevisani sees Beijing’s concerns about a strong dollar as selfish, given that in the past Chinese authorities have intervened in currency markets to depress the yuan against the dollar in response to U.S. tariffs on Chinese products.

“The best examples are in 2019 and 2020, when the dollar touched 7.1780 and 7.1380, respectively, as Beijing tried to undercut the Trump administration’s aggressive trade policies,” Trevisani said.

Still, the yuan’s devaluation is a blow to Beijing’s efforts to turn the yuan into an alternative to the dollar.

But Beijing has a way to reverse the yuan’s exchange rate: by selling the national debt it has accumulated by recouping its trade surplus. As of July 2022, China holds nearly $1.235 trillion worth of U.S. Treasuries.

Still, experts are divided on whether Beijing will start emptying U.S. Treasuries to support the yuan. Trevisani thinks this option is impossible because it would backfire. “As Washington’s second-largest debt holder after Japan, Beijing’s sale of U.S. Treasuries will spook financial markets,” he said. “As a result, U.S. interest rates would rise, driving the dollar higher.”

Dr. Tenpao Lee, a professor of economics at Niagara University, had mixed reactions. He believes that in the long run, Beijing may indeed use this option as it wants to internationalise its currency and play a key role in the global economy. But that option may not be feasible in the short term, as its holdings of U.S. Treasuries are more valuable than its international transactions.

Still, Li sees China’s massive holdings of U.S. Treasuries as a constraint on U.S. monetary policy.

“As a global currency, more than half of the dollar circulates in the global economy,” he told IBT in an email. “On the one hand, we would prefer to have more international trade in dollars. On the other hand, we need to limit dollar holdings by other countries to preserve our ability to independently set monetary policy.”