Digital Yuan to Cut China’s Dependency on the Dollar Even Further

The economic tussle between the United States and China has been one of the most closely-watched conflicts of the past half-decade. It appears to now be shifting into the cryptocurrency sector with China reportedly looking to curtail the dollar’s influence with its digital asset.

Reduced Dollar-Based Transactions in China

It’s no news that China has been making significant progress with the digital yuan, its Central Bank Digital Currency (CBDC). While there are several rationales for the government to be moving in this direction, Zhou Xiaochuan, a former governor of the Peoples’ Bank of China and the head of the Chinese Finance Association, explained that Beijing aims to curb the dollar’s influence on its economy. 

Speaking at the Eurasia Forum conference earlier this week, Zhou explained that China had a much different motivation for developing a CBDC than other countries. Drawing the lines of distinction from the country and those making up the G7, he explained that the latter appears to be more concerned with protecting their economies from Bitcoin, Facebook’s Libra stablecoin, and other legacy digital assets. 

However, for China, it is about ensuring that citizens can use digital yuan to make local transactions. This way, they will have little use for the dollar in their economy. 

“We [need] to prevent dollarization. This is one of the major designing points of the Chinese DCEP,” Zhou proclaimed.   

Another Smack on Uncle Sam 

For all its talk of economic freedom, China has still maintained a significant dependence on the greenback for years. However, with economic tensions between the two economic superpowers rising, the Xi administration has made moves to cut ties with the global reserve currency. 

Last August, the Asian superpower allowed its currency to fall, making Chinese goods cheaper to export – especially relative to American goods. The move, which was done in light of hikes in tariffs from the United States, shocked markets. 

Given that the country’s yuan is dollar-pegged, it continued to move away from the greenback and embraced other currencies. In November, ANZ Research reported that the government had been silently diversifying its foreign exchange reserves and moving away from the dollar. Per a CNBC report, the government had allegedly diversified its offshore portfolios to bring in alternative investments. Between June and November 2019, about 1.8 trillion yuan ($256 billion at the time) had been moved. 

Raymond Yeung, the chief economist for the Greater China region, said: 

“Although China still allocates a high share of its FX exchange reserves to the US dollar, estimated at around 59% as of June 2019, the pace of diversification into other currencies will likely quicken going forward.”

It now appears that the country is taking the next step to free itself from Uncle Sam. The plan could work, especially if the digital yuan proves to be as effective a payment method as China’s government claims is to be. For now, the government continues to run tests on the asset, with the next phase expected to come sometime next year.

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