🤯 China's Plan to Kill the Dollar
The dollar is the ultimate in-demand currency right now. But China plans to change this very soon.
The Dollar currently rules the world.
It is the most powerful currency because all the major currencies in the world are pegged to it.
Not just that, oil is pegged to it.
You want oil, you need dollars.
But now China, the US' biggest rival, is trying to end the dollar's supremacy.
🎲 China's Move
China's central bank has announced that it has signed a Renminbi1 Liquidity Agreement with the Bank for International Settlements.
What's that?
The Bank of International Settlements is kind of like the central bank of all central banks. It's the place where all major central banks come to strike deals.
The Renminbi Liquidity Agreement will see participation from the central banks of China, Indonesia, Malaysia, Hong Kong, Singapore and Chile.
All of these countries will come together and contribute a minimum of 15 billion yuan to a common fund which they can all access.
Kind of like forming a joint account with your friends.
Then whenever a country is in urgent need of funds, they can draw not only their funds but also those contributed by other countries if they provide collateral.Â
Okay, sounds like a normal enough plan that these countries have come up with to protect their interests in these tough times.
But how will this challenge the dollar?
Most countries rely on their dollar reserves for import transactions.
What China here has cleverly done is tried to create a yuan reserve that more and more countries can rely on.
🤔 Why Will Countries Want Yuan Reserves?
Right now, thanks to record high inflation, the US has raised its interest rates to a 20-year high.
So, a lot of investors are pouring their money in US bonds, increasing the demand for the dollar.
And since the supply of the dollar is limited, the price of the dollar is increasing.
Most currencies are pegged to the dollar, so a lot of emerging market (developing nations like India and Indonesia) currencies are declining in comparison.
That's because not enough money is flowing into these emerging markets right now, devaluing their currency.
Now, this devalued currency could pose a major problem for these countries as it increases inflation as people have to spend more money to buy the same amount of goods.
So, to raise the value of their currencies a lot of countries sell their dollar reserves to increase the supply of dollars in the market and reduce the price.
But this plan has a major flaw: it depletes countries' foreign reserves.
Just take a look at India. Selling foreign reserves to boost the rupee has left us with funds for only 10 months of imports.Â
This is where China's reserves come in.
Anytime a country is low on foreign reserves, it can tap into China's yuan fund and get liquidity easy-peasy.
Now, you’re probably wondering that if most countries transact in dollar reserves, what good are these yuans?
Okay, ReadOn, but you just said most countries transact in dollar reserves. So, what good are these yuans?
Well, that is what China is trying to change. You see, if more and more countries join this agreement, they could agree amongst themselves to pay for imports in yuan instead of dollars.
This would slowly reduce the importance of dollars.
China and Russia eventually want the BRICS countries to develop a new reserve currency to oust the dollar.
And what's more, China is even in talks with Saudi Arabia to allow it and other countries to purchase oil in yuan.Â
This may further boost the currency's value and make it a major competitor of the dollar.
Now, we'll have to wait and see if more countries agree to make yuan or some other currency the reserve currency.
âš¡ In a line: China is forming a new yuan reserve to provide countries with much-needed liquidity and defeat the dollar.
💡 Quick question: Do you think India should also join China in its efforts to reduce dependence on USD?
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Renminbi is the official currency of China, meanwhile yuan is a unit of renminbi. These terms are often used interchangeably.