After the 2009 Global Financial Crisis Zhou Xiaochuan, Governor of the Peoples Bank of China, announced, “The world needs an international reserve currency that is disconnected from individual nations and able to remain stable in the long run, removing the inherent deficiencies caused by using credit-based national currencies”. He proposed Special Drawing Rights, SDRs, valued against a basket of trading currencies and commodities like wheat and iron ore. Nobelists C. Fred Bergsten, Robert Mundell, and Joseph Stieglitz agreed, “The creation of a global currency would restore a needed coherence to the international monetary system, give the IMF a function that would help it to promote stability and be a catalyst for international harmony”.
Beijing began valuing the yuan against a currency basket in 2012 and the IMF made its first SDR loan in 2014. The World Bank issued the first SDR bonds in 2016, Standard Chartered Bank issued the first commercial SDR notes in 2017, and the world’s central banks began stating their currency reserves in SDRs in 2019.
Former US Treasury Secretary Larry Summers called China’s 2015 creation of the Asian Infrastructure Investment Bank, “The moment the United States lost its role as the underwriter of the global economic system. I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution–and the failure of the US to persuade dozens of its traditional allies, starting with Britain–to stay out of it”.
The AIIB’s one hundred member countries have eighty percent of the world’s population and two-thirds of its GDP. By mobilizing their savings, the new bank accesses a trillion dollars every year for long term, low interest loans to regional infrastructure, poverty reduction, growth, and climate change mitigation.
In 2020, as part of a plan for more efficient administration, the People’s Bank of China issued Digital Yuan, the world’s first digital currency backed by a central bank. Unlike privately issued mobile payments and credit cards, the Digital Yuan is a State liability, like banknotes and, since a billion Chinese already use mobile payments, the transition to digital currency should be seamless.
Harvard’s Aditi Kumar says, “Nations seeking to leapfrog development of digital currency and payments systems will likely seek out Chinese financial technology, and Chinese firms, at the forefront of digital payment technology, will capture the economic gains of a rapidly digitizing global economy. China’s central bank will have a panopticon view of all transactions in all digital currencies that leverage its technology, further strengthening its information advantage”.
Author Bruno Maçaes envisions the impact of these programs thirty years hence:
The year is 2049, one hundred years after the founding of the People’s Republic of China. The Belt and Road Initiative is complete... Some of the infrastructure projects are truly stunning and stand as the highest example of what human ingenuity can achieve in its drive to master natural forces. A bridge crossing the Caspian Sea—125 miles from Azerbaijan to Turkmenistan—has made road transport between Europe and China fast and easy, changing old mental maps that separated continents. The Kra Isthmus Canal in Thailand has done the same for the Indian and Pacific oceans. No longer do we think of them as two separate oceans. In Africa a high-speed railway connects the two coasts, traversing Djibouti, Ethiopia, South Sudan, the Central African Republic, and Cameroon in under twenty hours. Trade between Africa, Asia, and South America increasingly uses this route.
Historian David Graeber adds, “There’s every reason to believe that, from China’s point of view, this is the first stage of a very long process of reducing the United States to something like a traditional Chinese client state”.
SDRs go back to 1969 and certainly they played a much bigger role in Finance back in the 1980s than today. There is a lot of confusion and throwing about the world de-dollarisation.
But start with the meaning of money - Economists say:
First: Money is a store of value.
Second: Money is a unit of account.
Third: Money is a medium of exchange.
With modern computers and networks it is easy to replace Money as a unit of account or a medium of exchange. Trivially easy.
The challenge is Money as a store of value. And so Money markets, not FX markets or accounting.
Specifically if you have $10 or 20bn worth which you want to place in liquid places in lots of at least $1bn a hit and which you can withdraw all within a week, where do you go? There is only one place, the US dollar money markets, and replacing that will not be easy. More likely it will collapse due to credit issues long before an alternative emerges.
More accurately we should be talking about the Money market - demand and supply for Bank deposits and short dated (<3m, including <2w) securities. Where those deposits are seen to be of high credit quality. So that largely means US government, US states and US corporates plus a smaller amount from Europe.
Until China (or Russia) is operating massive twin government and trade deficits it is hard to see where those potential borrowers are coming from.
De-dollarisation of $ as a store of money is the hardest challenge.
I like the comments of Larry Summers, it chimes with my own view that we are not seeing US resisting the future challenge of China for hegemony. We are seeing the angry reaction of a defeated empire 6 or 7 years afterwards.