China’s gradual shift away from the U.S. dollar in favor of other currencies, including its own yuan, could have significant implications for the dollar’s role in the global economy. Over the past year, several key developments and trends have emerged:
- De-dollarization efforts: Countries like China, Russia, and others in the BRICS bloc are reportedly leading efforts to reduce their reliance on the U.S. dollar, potentially affecting its dominance in global reserves and transactions. This is partly in response to U.S. sanctions and foreign policy plays, as well as a desire to diversify in the face of macroeconomic challenges in the U.S. (source: [1]).
- Yuan’s growing role: While the U.S. dollar still accounts for a significant portion of global allocated foreign exchange reserves (59.17% as of the third quarter of 2023), the Chinese yuan has been making inroads, albeit at a slow pace. It accounted for 2.37% of global reserves in the same period, with a sharp uptick in its use for trade to and from China (source: [0]).
- Potential for economic crisis: There is a risk that the shift from the U.S. dollar to the Chinese yuan by emerging economies could lead to a global economic crisis, extreme inflation in the U.S., and a weakening of its economic and superpower status, influenced by factors like U.S. policies and global conflicts (source: [4]).
- Macroeconomic implications: The U.S. dollar is expected to decline in value relative to the Chinese yuan over the next decade at an average annual rate of 0.3%. This could reflect a broader trend of the dollar’s weakening in the global currency market (source: [6]).
In summary, China’s gradual move away from the U.S. dollar could have a multi-faceted impact, including reducing the dollar’s dominance in global reserves, increasing the role of the yuan in global trade, and potentially leading to economic instability and a shift in global economic power dynamics.