With Its e-RMB, China Aims the First-Mover Advantage to Break the U.S. Dollar Monopoly
The U.S. dollar has been the world’s reserve currency for 100 years now. This gives an incredible advantage to the United States, which has been able to establish itself as the world’s leading economic power for many decades.
With the U.S. dollar, the United States has a global monopoly, which gives it an exorbitant privilege.
This is nothing new since as soon as the Bretton Woods system was established in 1944 at the end of the Second World War, voices were raised all over the world against “America’s exorbitant privilege”.
The U.S. dollar makes the rest of the world pay for American living standards
In France, many economists had explained that this privilege would produce an asymmetrical financial system in which foreigners “see themselves supporting American living standards and subsidizing American multinationals”.
These economists were right since this is exactly what has been happening for nearly 80 years. The abandonment of the gold standard system in August 1971 only strengthened the dominance of the U.S. dollar over the world.
Under these conditions, the United States has every latitude to live beyond its means by making other countries around the world pay a heavy price. The situation has become even more serious since the economic crisis of 2008 with the U.S. dollar money supply growing at an ever-increasing rate.
At the same time, the increase in the U.S. public debt has also accelerated.
If since the early 1990s, the U.S. public debt had always been growing faster than the U.S. economy, the situation got out of control in 2020. The economic crisis we are going through has seen the U.S. debt go into an exponential growth model.
China considers the U.S. dollar monopoly unacceptable
If the situation appears increasingly unacceptable around the world, it is even more so for a country like China.
Indeed, Xi Jinping’s China aims to become the world’s leading power by 2030. As long as the U.S. dollar has such a global monopoly, China will not be able to carry out its project.
Beating an opponent playing on its playing field is never easy. It even becomes impossible when that opponent dictates the rules of the game you are playing.
This is a bit like the situation in which China finds itself facing the United States right now.
The Chinese Communist Party has perfectly understood that it will not be able to break the monopoly of the U.S. dollar by continuing to play on the traditional playing field of the current monetary and financial system. This playing field and the people who run it are Americans.
China decides to move to a new battlefield to break the U.S. dollar monopoly
China has therefore decided to take advantage of the world’s digital revolution to launch a new front in its fight against the United States.
This new front is that of digital currencies. By being the first country to launch itself into this new universe, China hopes to benefit from the first-mover advantage. More than a hope, China considers that it has an absolute need for it to have the first-mover advantage.
This is why China has strongly accelerated since the end of 2019 in its digital renminbi project. Known as e-RMB, this digital version of the Chinese currency is at a more than advanced stage as it is currently being tested in four major Chinese cities.
The official launch could even take place in 2021 at the pace at which China is progressing in its project.
In an article in China Finance, which is published by the People’s Bank of China (PBOC), China’s ambitions were officially revealed last week. The article explains that the rights to issue and control a digital currency would become the new playing field where sovereign countries would compete in the coming years.
The digital renminbi project is a unique opportunity for China
The digital revolution that is sweeping the world will not spare money. The issuance and circulation of digital currencies will bring profound changes to the current monetary and financial system.
The article states that China sees many advantages and opportunities with its e-RMB:
“China has many advantages and opportunities in issuing fiat digital currencies, so it should accelerate the pace to seize the first track.”
The opportunity to be the first country on this new playing field is what has been motivating China for several months now. The development of e-RMB has enabled China to register 130 patent applications related to cryptocurrency ranging from issuance to circulation as of end-April.
Meanwhile, the United States is still in the midst of discussions on whether or not to create a digital dollar.
The United States is still hesitating about a digital dollar
The Federal Reserve Bank of Cleveland has just published a note in which it indicates that it is exploring more and more seriously the possibility of a digital dollar.
What is worrying is that the United States already has a huge delay on the Chinese project.
“The experience with pandemic emergency payments has brought forward an idea that was already gaining increased attention at central banks around the world, that is, central bank digital currency (CBDC). Legislation has proposed that each American has an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments.”
This confirms that the Fed is still only at the stage of thinking about a digital dollar.
The Fed explains that it weighs the advantages and risks of such a creation, as it specifies a little further on its statement:
“In addition, a range of potential risks and policy issues surrounding central bank digital currency needs to be better understood, and the costs and benefits evaluated.”
The hesitation of the United States on the digital dollar leaves the battlefield open to China
While China is making great strides to dominate tomorrow’s world in terms of money with its e-RMB, the United States is hesitating.
This hesitation could be costly in the years to come. By leaving the field open to China in this area, the United States is making a strategic mistake.
China expects to be able to test its e-RMB as widely as possible during the 2022 Olympic Winter Games. Then, it will be time to push for greater adoption around the world to undermine the monopoly of the U.S. dollar that so penalizes China in its ambition to be the world’s leading power by 2030.
To do so, China intends to push strongly for the use of e-RMB in the trade exchanges that will be carried out along its Belt and Road Initiative. The countries that are part of this ambitious project should facilitate the Chinese project.
Nothing says that it will work, but what is certain is that China is giving itself the means to overthrow the global monopoly of the U.S. dollar.
As the U.S. dollar celebrates 100 years as the world’s reserve currency this year, you have to keep in mind that the average life expectancy of a world reserve currency has been 100 years since 1450.
The position of the U.S. dollar therefore seems precarious. It is all the more precarious because the money supply of the U.S. dollar and the U.S. public debt seem to be completely out of control. All this weakens the US dollar a little more each day at the world level.
While many people emphasize the fact that there is no credible alternative to the US dollar at the moment, we should not underestimate initiatives such as those of China, which aim to create an alternative by bringing the battle to a brand new battlefield: that of the digital revolution.
The coming months and years promise to be full of new developments in this merciless fight between the United States and China for the role of the world’s leading power.