As Beijing’s economic power rises, the demand for its currency is expected to grow
ISLAMABAD—The U.S. dollar has long dominated the global marketplace, and not even the introduction of the euro by the European Union could break its virtual monopoly. Now, a rising economic powerhouse is seeking to curb international dependence on the greenback: China. And according to some analysts, in the decades to come various countries may be enticed to switch to the “redback.”
To this end, Beijing is making inroads throughout the world, including in Pakistan. The two nations are developing the China-Pak Economic Corridor (CPEC) and Chinese policymakers are pressuring Islamabad to use the yuan for bilateral trade. For its part, Washington has been very critical of CPEC and allegedly has backed efforts by India—Pakistan’s arch-foe—to sabotage the initiative. The jockeying for economic supremacy raises the prospect of a currency war between the world’s two largest economies.
In this respect, candidate Donald Trump publicly denounced China during the 2016 U.S. presidential campaign as a “currency manipulator” that was “rap[ing]” America, but has walked back the allegations since assuming office. Beijing in the past has been suspected of buying and selling foreign currencies in order to devalue the yuan, specifically relative to the dollar in order to gain unfair trade advantages by keeping its exports cheap.
As a corollary, American manufacturers have complained that the purported practice has negatively impacted their businesses by artificially inflating the price of their products. Economists contend this has led to imbalances in the global economy by contributing to huge Chinese trade surpluses and large American trade deficits.
But China appears unmoved by the criticism and is committed to pursuing its own agenda.
Earlier this month, Pakistan’s Minister for Planning, Development and Interior, Ahsan Iqbal, confirmed that the yuan was being considered for primary use for transactions under the CPEC. “The experts of both sides will explore [the] possibility of using Chinese currency for undertaking bilateral trade as it will help Pakistan in reducing its dependence on [the] U.S. dollar,” he told reporters after unveiling the so-called Long Term Plan which calls for China to invest $60 billion in Pakistan by 2030.
Iqbal told The Media Line that an additional $46 billion-worth of projects relating to the CPEC have also been signed, nearly half of which have been initiated.
For his part, Mohammad Ali, a senior Pakistani official, suggested that the decision to use the yuan was a fait accompli. He told The Media Line “at the government level, both sides opted to use China’s currency for trade transactions, the signing of loans and their repayment, the repatriations of profits and for other purposes.”
The CPEC will, among other things, provide western Chinese regions with road access to the deep-sea port at Gwadar, securing for Beijing a much shorter route through Pakistan by which to import fuel and export products to markets in Asia, Europe and Africa. Pakistan will for the most part benefit from major infrastructure investments and then from income generated by the gateway’s operations.
Bilateral trade between Pakistan and China stood at around $14 billion in the years 2015 and 2016 and officials anticipate the volume to increase significantly as the CPEC is further developed.
Globally, China has in recent times achieved multiple milestones aimed at promoting its currency, including the establishment of a swap agreement in 2013—subsequently extended three years later—between the European Central Bank and the People’s Bank of China. The deal aims to facilitate commercial exchanges between the Eurozone and China by giving European banks access to 350 billion yuan and Chinese banks access to 45 billion euros.
The deal followed similar agreements with the United Kingdom, Australia and Brazil.
China is the EU’s second biggest trading partner, with about 1 billion euros-worth of goods exchanged each day. This has put the yuan on a fast-track to potentially replacing the American dollar as the bloc’s favored currency.
Moreover, since China’s currency is linked to the gold standard, major countries view it as potentially less volatile than the greenback. In this respect, over the past two years seven additional countries have been added to a list of fifty others that use the yuan to pay for more than 10% of their purchases from China or Hong Kong.
According to Carl Weinberg, a leading economist, the Holy Grail for Beijing is to “compel” Saudi Arabia to trade its oil in yuan. “[Riyadh has] to pay attention to this because even as much as one or two years from now, Chinese demand will dwarf U.S. demand,” he said. If this happens, the rest of the oil market will likely follow suit, effectively ending the U.S. dollar’s status as the world’s reserve currency.
According to some reports, China’s central bank holds some 5 trillion American dollars, which could be converted into yuan. And with more bilateral exchanges being set up as China moves further down the path of market liberalization, the world’s appetite for yuan is expected to grow.