De-dollarization inevitable as yuan’s global status rises

Source:Global Times Published: 2019/1/3 15:33:39

Illustration: Luo Xuan/GT

The global economy and the trade governance system have shifted from an old model in which other economies were orbiting around the US toward a three-horse race - the US, EU and China - meaning that de-dollarization is inevitable. The global trade, production and consumption arena has become a three-way race among Asia, Europe and the US, but the international currency system has long been dominated by the US dollar, highlighting a mismatch between the real global economy and international currency system.

This mismatch has turned out to be the major contradiction facing the global economy and financial system, fueling the China-US trade dispute and prompting reforms in the global economic governance system.

Since China's accession to the WTO in 2001, the country has made phenomenal progress in trade terms. It went from accounting for less than 5 percent of global trade in 2000 to about 14.56 percent in 2017. China has become one of the world's three major trading powers, along with the US and Europe, which held a combined share of 43.53 percent of global trade in 2017.

On a larger scale, there is Asia pivoting on China, which held 27 percent of global GDP in 2017. The 28 EU member states that revolve around Germany and France accounted for 15.6 percent and the three North American Free Trade Agreement signatories, with the US at the core, held a 27.5 percent share.

But when it comes to global foreign-reserve currencies, the US dollar still holds a dominant position, followed by the euro. The yuan, for its part, only plays a minor role. The Chinese currency's global status is not in line with China's fundamentals, and it is inevitable that the yuan's share of international reserve currencies will be on the rise.

History shows that when the US dollar replaced the pound sterling, the size of the US economy had already far outstripped that of the UK. China's GDP is still less than that of the US, which suggests it will take more time for the yuan to overtake the US dollar. But in the current era, with such innovations as fintech, the reconstruction of global currency system may be faster than expected. De-dollarization and diversification of international currencies will inevitably happen.

Amid the trade friction with the US, China ought to join the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP), advance WTO reforms and build an Asian community.

Joining the CPTPP could enable China to break out of the encirclement built by the US, thereby easing trade tensions. Meanwhile, it could put China at an advantageous position in the global production network and in setting relevant rules, so as to give momentum to China's reforms, which have entered the deep-water zone.

As for WTO reforms, China is supposed to play its part in reinstating the WTO's function as a forum for trade negotiations and improving the mechanism for resolving trade disputes, among other issues.

China is also moving up the global value chain, transitioning toward medium- to high-end manufacturing, while latecomer countries in Asia are carrying on in the midstream and downstream sectors, while Japan still dominates the high-end industries.

This signals a complete value chain in the region. The establishment of an Asian community at this moment can therefore enhance complementarity among Asian economies and boost their ability to withstand external risks.

The 10+3 cooperation mechanism, referring to the 10 member states of the Association of Southeast Asian Nations (ASEAN) plus China, Japan and South Korea, could be an ideal choice for the Asian community.

After a transition period of about two years, the Chinese economy is well-placed for robust growth over the longer run. Although the economy currently faces downward pressure, there are still plenty of measures in store to acceleate growth. A consensus ought to be reached as soon as possible: mobilizing all possible resources to drive growth.

The article was based on a speech by Ju Jiandong, a professor with Tsinghua University at a seminar held at PBC School of Finance, Tsinghua University in December.
Newspaper headline: De-dollarization in global currency system inevitable as yuan’s global status rises


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