Summary of Key Points
This article analyzes the current changes in the international monetary system: The dominance of the US dollar is entering a period of accelerated adjustment due to multiple factors, creating strategic opportunities for the internationalization of the Chinese yuan. The internationalization of the yuan has established new mechanisms for settling commodities, financing, and digital payments, and has developed a path that reflects China's unique economic characteristics, which involves the retention of current account surpluses while experiencing deficits in financial accounts. Hong Kong, as an offshore financial center, plays a crucial role in advancing the internationalization of the yuan and needs to focus on four key areas: the stock market, bonds, derivatives, and digital currencies.
I. Is the Dominance of the US Dollar in Decline? Four Major Challenges Accelerate Its Adjustment
The dominance of the US dollar did not collapse suddenly, but there are now four major issues that are making it increasingly unstable:
1. Tariff Policies Worsen the Triffin Dilemma: Simply put, for the US to maintain the use of the dollar globally, it relies on trade deficits (buying more than selling). However, excessive deficits lead to foreign debt, which undermines the credibility of the dollar. Trump's tariffs aim to reduce these deficits but also result in a decrease in the global supply of dollars, exacerbating the problem.
2. The Dollar as a Weapon: The US frequently uses the SWIFT payment system to sanction countries like Iran and Russia. Other countries are developing their own payment systems (e.g., Europe’s INSTEX and China’s CIPS), weakening the dollar’s monopoly.
3. Potential Reduction in the Independence of the Federal Reserve: The Fed is considered the anchor of the dollar’s stability, but President Trump’s appointee, Jerome Powell, may be pressured to cut interest rates for political reasons (e.g., to boost the stock market). If the Fed loses its independence, the dollar’s credibility will be at risk.
4. High Oil Prices Drive Up US Interest Rates: Conflicts in the Middle East have kept oil prices above $90 per barrel, making it difficult to control inflation and leading to higher interest rates. If the yield on 10-year US Treasury bonds falls below 5%, the stock and bond markets could experience a sharp decline, prompting global investors to sell dollar assets.
II. New Opportunities for the Internationalization of the Yuan
With the instability of the dollar, new opportunities arise for the yuan. There are three main areas where progress can be made:
1. Increasing Use of the Yuan in Commodity Settlements: China and Russia almost completely use their own currencies for oil trade, and similar arrangements are being established for oil transactions with Middle Eastern countries. This trend could extend to natural gas, iron ore, and agricultural products. By leveraging China’s industrial chain advantages, more companies can use the yuan for settlements, solidifying its foundation in the real economy.
2. More Cost-Effective Yuan Financing: China’s interest rates are lower than those in the US (e.g., 4% compared to over 5% on US mortgages), making the yuan attractive to global businesses. Offshore yuan loans, “dim sum bonds” (offshore yuan-denominated bonds), and “panda bonds” (yuan bonds issued by foreign institutions in China) are all growing rapidly, making the yuan a preferred financing option.
3. Dual Approaches to Cross-Border Payments: While using the traditional CIPS system, the development of Digital Yuan 2.0, as well as cooperation with multilateral central bank digital currency initiatives (mBridge), will enable more countries to use the yuan for cross-border settlements, bypassing the US dollar system.
III. Does the Internationalization of the Yuan Follow the European and American Path? A Chinese-Unique Approach
Previously, it was thought that internationalizing a currency required creating trade deficits. However, China’s persistent current account surplus (selling more than buying) presents a different challenge. The article highlights that China has developed a unique approach:
- Retaining Current Account Surpluses in Yuan: Yuan earned from selling goods to foreign countries are first retained domestically.
- Exporting the Yuan through Financial Accounts: The yuan is being exported through three channels: ① domestic companies investing overseas (e.g., building factories in Southeast Asia); ② domestic residents and businesses purchasing foreign assets; ③ global companies borrowing yuan (e.g., through offshore loans). Data from the past two to three years shows that these channels have all contributed to the export of yuan.
IV. Why Is Hong Kong Key to the Internationalization of the Yuan?
As an offshore financial center, Hong Kong serves as a crucial hub for the internationalization of the yuan. To enhance its role, it needs to address several areas:
1. Strengthening the Stock Market: The Hong Kong stock market is a major platform for buying Chinese stocks, both for foreign institutions and domestic investors. This helps to stabilize the supply of yuan in the offshore market.
2. Developing the Bond Market: Although Hong Kong’s bond market is weaker than Singapore’s, it needs to focus on developing offshore yuan bonds (dim sum bonds). With attractive financing conditions, the market for dim sum bonds is expected to grow significantly. Additionally, efforts should be made to improve trading mechanisms and indices to make bonds more accessible.
3. Improving Foreign Exchange Derivatives: Hong Kong already has a large amount of offshore yuan but lacks adequate tools for hedging exchange rate risks (e.g., forwards and futures). Developing a mature exchange rate framework will enable companies to manage their risks, supporting the sustainable development of the bond market.
4. Pioneering Digital Currency Innovation: Hong Kong can pilot stablecoins for the Hong Kong dollar and the yuan, exploring asset tokenization (e.g., converting real estate and stocks into digital assets), and serving as a testing ground for global digital currency initiatives.
The core message of this article is that the weakening dominance of the US dollar creates opportunities for the yuan. China is taking its own path to internationalize its currency, with Hong Kong playing a pivotal role in this process. The article explains these complex monetary system changes in simple terms, making it accessible to a wide audience and highlighting the potential benefits and pathways for the internationalization of the yuan.