Excitable commentators who say China’s digital yuan is a threat to the dollar should take the word of Chinese central bank deputy governor
who said on Sunday that the country’s digital yuan isn’t an effort to displace the greenback.
The yuan’s digitization is fascinating in terms of its political implications and regarding the new economic levers it might give the government domestically. But it offers relatively little as a tool to boost the yuan’s limp international presence, let alone as a weapon to challenge the dollar’s supremacy.
As the currency of the world’s largest trading economy, the yuan punches far below its weight. According to an International Monetary Fund study published in 2019, data from 2016 suggests that about 93% of China’s imports and 95% of its exports were denominated in dollars.
Not much seems to have changed. In February, the yuan’s share of global payments was 2.2%, compared with February 2016’s 2.45%, according to data from the Society for Worldwide Interbank Financial Telecommunication. Even that overstates its international use: A consistent three-quarters of its total global payments are conducted in Hong Kong.
Speaking to the U.S.-China Economic and Security Review Commission last week, Martin Chorzempa, senior fellow at the Peterson Institute for International Economics, said that he has yet to see a convincing argument of how digitization really promotes global use.
Transactions may be faster than traditional bank transfers. But for major global corporations, immediacy is far from the foremost concern. They would have to acquire yuan to make the transactions in the first place. Digitization could skirt U.S. sanctions, but most international businesses will have no desire to do so, and sanctions aren’t a major factor in the limited use of the yuan abroad.
The yuan’s global usefulness as a unit of account or a medium of exchange—two of the three traditional functions of money—might one day be improved with broader international use. But its function as a store of value, the third leg of the stool, is almost totally severed by China’s capital controls.
The range of options to foreigners who find themselves with a pile of yuan is minimal, compared with a pile of dollars, euros or yen. China has far fewer high-quality assets, and the government’s squeamishness about outflows of capital make the risk of not being able to retrieve funds far higher.
Digitization may speed up transactions and remove some of the friction involved in international payments. But it won’t transform currencies people don’t want to hold into currencies that they do. For most international business, the yuan still sits in the former camp and shows little sign of moving out.
Write to Mike Bird at Mike.Bird@wsj.com
Corrections & Amplifications
IMF data suggests that about 93% of China’s imports and 95% of its exports were denominated in dollars. An earlier version of this article incorrectly said that about 93% of China’s exports and 95% of its imports were denominated in dollars. (Corrected on April 19)
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Appeared in the April 20, 2021, print edition as ‘China’s Digital Yuan Is No Threat to the Dollar.’