The BRICS alliance made it clear at the ongoing summit in Johannesburg that local currencies will be used to settle cross-border transactions among member countries. The Chinese Yuan is a strong contender among the other currencies that could be used for remittances.
If more countries begin to ditch the U.S. dollar and trade in the Chinese Yuan, will the greenback decline? In this article, we will highlight the level of threat the Chinese Yuan can pose against the U.S. dollar.
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BRICS: Chinese Yuan a Threat To the U.S. Dollar’s Prospects?
Benn Steil, the Director of International Economics at the Council on Foreign Relations, said that the Chinese Yuan will not be a threat to the U.S. dollar. The economist highlighted that the Yuan accounts for less than 3% of the world’s global reserves. On the contrary, the U.S. dollar accounts for 59% of all global transactions in 2023. There’s a big gap between the two, and the Chinese Yuan might not race ahead in large numbers.
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“The Chinese renminbi, which accounts for less than 3% of global reserves, is not a serious threat to dollar hegemony,” Steil said.
The economist added that other currencies have slim chances of dethroning the U.S. dollar on the global stage. He stressed that the only threat to the USD comes from the U.S. government and the Federal Reserve. Steil said that their bad policies could make the dollar head backward, eventually giving room for other currencies to compete.
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“The biggest threat to the dollar’s dominance comes not from competitive alternatives, but from the U.S. government itself,” he said. The analyst added, “The recent standoff over the federal debt ceiling and the Fitch Ratings downgrade,” are examples of bad governance. Therefore, while foreign currencies are not seen as a threat to the USD, the government’s policies are a danger.