How the yuan can replace the US dollar as the reserve currency

Us dollar banknote vs. yuan banknote against the background of a world map

It is clear that digital central bank money (CBDC) is coming. What is less clear, however, is how it will affect the international monetary order. More than ever, the question arises whether the US dollar will still be the global reserve currency at the end of this decade. How the oil company Saudi Aramco will turn its back on the US dollar and how the world’s largest free trade agreement, RCEP, could lead to a new „Asian Bretton Woods“.

There is no doubt that the US dollar is the global reserve currency. Even the world’s number two reserve currency, the euro, is far from being as established as the „greenback“. Not only is commodity trade conducted in US dollars, but non-American companies and states also hold US dollars as their reserve currency in order by Bitcoin Trader to remain able to act on the global stage, even if they are not bound by their national currency. Despite China’s economic rise and the simultaneous weakening of the Western industrial nations, there is no sign of a „Euro-Yuan-Flippening“, let alone a US Dollar replacement.

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Even an economic superiority of China over the USA, which could arise in the next five years, would not per se lead to a change of status. Rather, the rise and fall of a reserve currency should be understood as a process that can extend over several years, even decades – except in extreme situations such as wars and currency collapse. In addition to economic dominance, technological, political, military and cultural dominance are also decisive for the status of a currency.

The year 2020 marks a turning point in the currency hegemony of the US dollar and subsequently the euro. Not only did China carry out practical tests of its digital central bank currency, i.e. a digital yuan, this year, but further milestones have also been set for the replacement of the current reserve currency.

Yuan instead of US dollar: Saudi Aramco tries new ways

Saudi oil company Saudi Aramco – the world’s most valuable listed company – has announced that it is considering a bond issue in yuan rather than US dollars. Until recently, the mere possibility of issuing yuan-based securities in the international oil business was unthinkable. But growing business relations with China and China’s intention to establish a „Petroyuan“ are scratching at the supposedly immovable status of the US dollar. In addition, new technical infrastructures are calling into question the previous Western-dominated settlement standards.

In February this year, for example, the oil company Saudi Aramco invested five million US dollars in the block-chain-based oil trading platform Vakt. The start-up Vakt aims to make the trading process in commodities trading, especially oil, significantly more efficient by means of smart contracts, tokenisation and new block chain infrastructures. For states such as Dubai, the new trading infrastructures could mean independence from existing – mainly US-American – structures. In particular, the changeover to token infrastructures offers the opportunity to question the existing status of the US dollar as the reserve currency. This could reduce the impact of sanctions in the event of political disagreements and power games.

RCEP: The largest free trade agreement in the world

As the example of oil shows, international trade plays a particularly important role in monetary matters. The more nations agree to accept a currency for contracts and trade, the more power this gives to the issuing central bank and thus to the state. The RCEP free trade agreement concluded this month marks a historic turning point in international trade. The world’s largest free trade agreement or zone, where the US and Europe can only watch from the sidelines, has one leader: China.

The largest economy in the RCEP can thus take on the trade role that the US took on after the Second World War. Not only does this make China increasingly independent of the West, but it also allows it to impose its own standards, including the yuan as its reserve currency. Especially since the Asian region is already clearly superior to the West in terms of payment methods. Due to the higher degree of digitisation in payment methods, it is easier to integrate digital central bank money than, for example, in cash-loving Germany.