Moe Zoyari/Bloomberg
- There's good reason why China wants to dethrone the US dollar with its yuan, or even a collective of other currencies.
- "The dollar's reserve status is a privilege that gives the US significant political, economic and market influence," TS Lombard said.
- But China's yuan has little to no chance at replacing the dollar, especially as its economy struggles.
China's yuan has little to no chance of dethroning the US dollar, even as global de-dollarization happens at a slow and steady pace.
That's according to a Wednesday note from GlobalData TS Lombard's Skylar Montgomery, who outlined why it makes sense China wants its yuan, or at least a collective of other currencies, to break up the dominance of the dollar.
"The dollar's reserve status is a privilege that gives the US significant political, economic and market influence," Montgomery said, adding that America's gain from its reserve status also represents pain for other countries.
Dollar strength damages emerging markets especially, she noted. Because most emerging market trade is in dollars, any appreciation in the greenback means other countries pay higher import prices.
Additionally, a strong US dollar amplifies energy price shocks and gives the US government leverage in using it as a political weapon, including when the West froze Russia's currency reserves after Moscow invaded Ukraine.
"That weaponization of the dollar is part of the reason why Russia, China, and other BRICS nations have vied for an alternative to the dollar," Montgomery said.
To be sure, de-dollarization is still happening, but just at a very slow pace.
Montgomery highlighted that the clearest sign of de-dollarization is seen in the dollar's share of global currency reserves, which has dropped from 72% in 2000 to 59% today.
"A decrease of less than 1% a year is extremely slow-moving and the dollar still makes up the majority of currency reserves," she observed. "Moreover, the 13% decline has benefited [the] euro, British pound, Canadian dollar, Chinese yuan, and Australian dollar fairly evenly."
But this also is one of the top reasons why the US dollar will continue to reign supreme and not be taken over by the yuan: there is no alternative.
Not one currency has emerged as a clear potential replacement to the US dollar, especially based off of currency reserve data. The euro has a 19.7% share of reserves, while the yuan has just 2.6%.
And don't expect China's yuan to gain much share of global currency reserves, according to the note.
"As a closed capital account, the unwillingness/inability to run a current account deficit, unpredictable government intervention and a managed currency have meant limited use of [yuan] internationally," Montgomery said.
And a collective currency from the BRICS countries also faces a lot of headwinds to take influence away from the dollar.
For example, growth among BRICS states is plummeting, China and India have conflicting strategic interests, and the bloc will struggle to justify its economic purpose, the note said.
And that's where the benefits of the US dollar's reserve status shine through.
"A reserve country must be willing to run large and persistent current account deficits to provide the rest of world with their currency needs. Moreover, the US enjoys powerful network effects, including deep capital markets, critical lender-of-last resort facilities and the provision of financial services to the rest of the world. Only the US can currently play this role," TS Lombard's Dario Perkins said in the note.