Has the US dollar finally met is match as a global reserve currency? Since the Second World War, the dollar has held sway thereby boosting America's economy but as with its military, so with its currency, challengers have emerged. China has made a strong presence by introducing an alternate currency clearance system through the China International Payment System to bypass the European-based SWIFT. Is the US dollar about to lose its clout?
Saturday October 10, 2015, 20:43 DST
The Chinese currency yuan is to be internationalized through a system whereby users could carry out transactions in the currency bypassing the US dollar. The China International Payment System (CIPS), a clearing system established by China’s Central Bank, has started a global payment system that provides cross-border transactions in yuan.
“The establishment of CIPS is an important milestone in yuan internationalization, providing the infrastructure that will connect global yuan users through one single system,” Helen Wong, greater China chief executive at HSBC, was quoted by London’s Financial Times.
Given the strength of the Chinese economy, notwithstanding its recent downturn that many observers believe has been deliberately engineered to make the yuan an attractive currency, there was speculation about when the Chinese currency will officially challenge the US dollar as an international currency.
With the establishment of CIPS, China is trying to reduce reliance on the global transaction services organization SWIFT, its own as well as that of others that want to break out of the western financial stranglehold.
Nineteen banks have been authorized to use CIPS. Among them are eight Chinese subsidiaries of foreign banks, including Citi, Deutsche Bank, HSBC and ANZ. Prior to the start of CIPS facility, transfers in Chinese currency were carried out mostly through offshore clearing banks in Hong Kong, Singapore and London. CIPS will accept payments in cross-border trade, direct investments, financing and personal remittances. Standard Chartered Bank completed the first transaction for Sweden’s IKEA.
Whereas CIPS will reduce reliance on SWIFT, the introduction of yuan will also challenge US dollar hegemony as a global currency. Over the last 50 years, the dollar has lost its place as the premier global reserve currency, its share dropping from 80% of international central bank reserves to about 60% today. This is still a very high percentage but yuan’s arrival through CIPS will definitely weaken the dollar’s clout.
Some US politicians—former Senator Ron Paul, for instance—have said the dollar is heading for a crash. His opinion is based on his analysis of the US economy and the bubbles it has created.
He likened the current upsurge in US economic activity to the bubbles more than a decade ago that people were sucked into and all of a sudden the market crashed in September 2008.
While the yuan’s arrival on the global financial scene will not cause such dramatic turmoil, it will certainly help countries suffering from US financial blackmail to breakout of its stranglehold and begin to organize their economies on their own priorities and interests.