Forget The Yuan: King Dollar Is Here To Stay

Many believe deficit spending will kill the US dollar as a reserve currency and the yuan will take over. They are wrong.

Economist Daniel Lacalle asks Can China Really Kill The US Dollar Supremacy?

>Why China Will Fail to Dethrone the US Dollar

First, because it wants the world to widely accept the Yuan while maintaining monetary repression via capital controls. As the British say, they want to “bake the cake and eat it.” What kind of global reserve can be created when capital controls are imposed? None. No economic agent will accept it.

Second, because most economic agents are aware that the huge imbalances of the Chinese economy will likely be disguised with a huge devaluation. The average of estimates assumes between an 18% and a 20% additional devaluation against its main trading currencies in the next five years. The more this inevitable correction is delayed, the less the possibility of reinforcing the credibility of the yuan as a world reserve currency.

Third, the financial balance is against them. The reason why China maintains completely obsolete capital controls is that domestic economic agents, as soon as markets open, do everything possible to get rid of their yuan in the face of the evidence of a huge devaluation. That is why China has lost almost one-third of its reserves in foreign currency in a few years.

The only way in which China and Russia could pose a threat to the US dollar would be to defend sound money and end the disastrous monetary policy that governments are conducting. A commitment to a return to a gold standard and avoid massive money supply increases. However, that does not seem to be the case, rather to spread China’s monetary imbalances to the rest of the world.

Yuan Use in Global Transactions

The US dollar is not only the most traded currency in the world but its use has increased since 2013 from 87% to 87.6% of global transactions according to BIS data from 2016. The total is 200% not 100% because currency transactions count twice.