With its economy going global and gaining strength, now is the right time for the Chinese financial system to reduce reliance on the U.S. dollar and accelerate the internationalization process of its renminbi. The Chinese yuan should also play a more important role in international trade settlements, in line with the country's economic growth.
The U.S. dollar-dominated international financial structure was established with the Bretton Woods System in 1944. During the past seven decades, the U.S. dollar has surely played an important role as a catalyst for the post-war international trade and economy, which has enjoyed a great rate of development. However, as time passed, the U.S. Federal Reserve has been, in recent years, constantly injecting excessive liquidity into the U.S. economy and the world economic system. The world’s outsized reliance on the U.S. dollar for trade has made the U.S. currency's value a key driver of world economic growth. Nevertheless, its unlimited currency easing policy has also posed external financial risks to other countries all over the world.
In 2018, the European Union launched a long-term plan for ensuring wider use of the euro in the global economy to better protect citizens and companies against external shocks, and to protect the bloc from potential currency risks by reducing its reliance on the U.S. dollar.
Also in 2018, Russia cut its share of U.S. dollars in the country's foreign reserves to a historic low, transferring nearly US$100 billion into the euro, the Chinese yuan and Japanese yen. In the same year, even the Venezuelan Government repatriated around US$550 million in gold bars from the Bank of England to reduce reliance on the U.S. dollar.
The outbreak of the novel coronavirus pandemic has further exposed the vulnerability of the present international financial system dominated by the U.S. dollar. Uncontrolled easing policies taken by the U.S. Federal Reserve has made it the de facto last lender of U.S. dollars through currency swap schemes.
As the country holding the world's largest amount of foreign exchange, mainly in the forms of U.S. dollars and treasury bonds, China can draw some experience from the EU, Russia and some other countries.
Moreover, as the world-famous saying goes: "Don't put all your eggs in one basket." For risk control purposes, China must diversify its foreign exchange basket. The country should diversify its currency portfolio for foreign reserves and reduce the share of U.S. dollar-denominated assets. At the same time, China should also try to establish a renminbi-based valuation and trading system for transactions of imported commodities.
It is surely not an easy task for China to reduce reliance on the U.S. dollar. To consolidate the renminbi's independence, China should take pains to readjust its economic development pattern from an export-led strategy to a more consumption-oriented economy, in spite of its huge accumulation of U.S. dollar reserves.
Less reliance on the U.S. dollar does not mean less foreign trade. On the contrary, it means more diversified and balanced trade with other countries. In order to better manage its gigantic foreign reserves, China should import more and find alternative ways to invest in the rest of the world such as in the euro zone, the ASEAN countries, South America and the African continent, other than simply putting its trade surplus back into U.S. treasury bills.
(The author is the editor-in-chief of Shenzhen Daily with a Ph.D. from the Journalism and Communication School of Wuhan University.)