The USD’s position as a global reserve currency is shaken by the yuan

According to Business Insider, this is because central banks are looking to diversify their foreign currency holdings into the Chinese yuan and other currencies.

However, the weakening US dollar dominance is not due to fluctuations in exchange rates or interest rates, but may instead depend on the actions of central banks. in other countries.

The IMF said that US dollar reserves have been steadily decreasing as central banks of countries mainly turned to two alternative directions: a quarter turned to yuan and three quarters learned non-traditional currencies from countries often play a limited role in reserve assets.

The IMF report states: “Characteristics of the development of the international reserve system over the past 20 years have been the growing departure from the US dollar, the recent increasing role of the renminbi, changes in Market liquidity, relative profitability, and reserve management have increased the appeal of non-traditional reserve currencies.”

According to economist Aleksandar Tomic, China has been promoting greater use of the yuan across Africa. Recent talks with Saudi Arabia over a yuan-denominated oil contract are the latest sign that the countries are thinking about some alternative currencies, or thinking about how to counterbalance the dollar. America.

“While any deal is symbolic, China is not the only one looking for a reserve currency other than the US dollar,” Tomic said. When there was demand for the US dollar, countries exposed themselves to the influence of the US financial industry and thus gave the US political leverage.”

Tomic said that if China wants to continue to increase the yuan’s share of global reserves, it will have to prove the yuan’s long-term stability to win the trust of other countries.

The IMF report comes at a time when Western sanctions have frozen much of Russia’s foreign currency holdings since it sent troops into Ukraine, showing the strength of the US dollar but also the strength of the US dollar. while emphasizing the risks of relying heavily on this currency.

Meanwhile, according to Baizhu Chen, a professor of finance and business economics at the University of Southern California (USA), the yuan may eventually develop into a reputable global reserve currency, but North Kinh will have to reduce interference in the economy.

“Chinese money will definitely be used more and more and play a much bigger role in the world,” said Mr. Baizhu Chen. Some countries feel the economy could be held hostage to US policies because the US dollar is dominating and countries want to diversify.” He said more than 70 central banks already hold some amount of yuan as reserve currency, while many African countries and some countries in the Middle East regularly use yuan in transactions.

Tomas Philipson, former acting chairman of the White House Council of Economic Advisers, warned: “If the US dollar loses its status as the world’s reserve currency, this will lead to an increase in US borrowing rates. in debt”. That means American consumers and businesses will face higher borrowing costs. Import prices are also likely to increase.

Currently, the US dollar accounts for 60% of global reserves compared to 2.5% of the yuan. In the volume of global payments, the US dollar accounts for 40% while the yuan accounts for about 3%, even though China is the second largest economy in the world.

That could change, but with major reforms. According to Chen, China will have to open up its market and reduce the level of government surveillance. In the bond market, that means that China must undertake reforms to achieve the same level of liquidity and efficiency as the US bond market. This also entails lifting restrictions on interest rates.

Mr. Chen also said that a more prominent role of the yuan would bring another benefit. Having multiple currencies in the global reserve reduces the risk of a single currency crash.