[The Editors' Verdict] China's Challenge to Dollar Hegemony

The anchor currency refers to a currency that is internationally accepted and has historically been issued by the world’s hegemonic powers. In ancient times, Rome issued it following Greece, and in the 20th century, the British Pound Sterling rose as the anchor currency, but after World War II, it ceded its position to the US Dollar.

Not only in general trade transaction settlements but also in global futures markets such as those in New York, Chicago, London, and Dubai, prices are set and settled in dollars. In 2019, 90% of international transactions worldwide were settled in US dollars, and about 60% of the foreign exchange reserves held by countries globally for foreign currency payments were in US dollars. The share of the Chinese Yuan in global transaction settlements is only 2%. China considers this disproportionate to its status.

Recently, China decided to settle the import of 3 million barrels of oil in Yuan instead of dollars. This shakes the petrodollar system, which is the foundation of US dollar hegemony. Over a decade ago, China began an internationalization project for its Yuan but faltered due to US opposition. However, as US-China relations have deteriorated recently, China seems to have solidified its policy to challenge dollar hegemony while the opportunity exists. In this regard, China is also accelerating the introduction of the digital Yuan.

In 2009, China began exploring ways to break away from dollar settlements with Middle Eastern oil-producing countries. Three years later, in 2012, China settled Iranian crude oil in Yuan. Although the US sanctions on Iran’s nuclear development program were cited as the reason, it is difficult to deny China’s intention to shake dollar hegemony. The Barack Obama administration in the US received China’s move with great displeasure and focused on concluding the Trans-Pacific Partnership (TPP) negotiations as a measure to counter China.

Over time, China sought more concrete methods. Since 2015, China started establishing a Yuan-settled crude oil futures exchange domestically and opened the Shanghai International Energy Exchange (INE) in 2018. INE is China’s first derivatives market open to foreign investors. However, with the inauguration of the Donald Trump administration and the imposition of stringent trade regulations on China, the exchange remained in a state of suspended operation. By settling 3 million barrels of Iraqi crude oil purchased from BP (British Petroleum), the world’s second-largest oil company, in Yuan in mid-this month, China has effectively announced domestically and internationally that it will no longer heed US concerns.

There may also be an intention to strike at the most vulnerable point of the US to induce a change in US policy toward China. If US-China relations worsen, it will be difficult to secure dollars due to export slumps, and China may have sought to establish a Yuan settlement base in advance to avoid disruptions in imports of energy, raw materials, and food. Although China holds about $3 trillion in foreign exchange reserves, if the trade surplus shrinks, foreign exchange could become insufficient, and if the US blocks access to the dollar financial network, China’s economy would face an emergency.

After overcoming the COVID-19 situation, China is expected to maintain a high growth rate for a considerable period. With 15% of the world economy and a GDP of $14 trillion, it is only a matter of time before China catches up with the US, which has an economic power of $20 trillion. By purchasing power parity (PPP) standards, China’s GDP already surpasses that of the US. Even if the US restrains China in trade, technology, and intellectual property (IP), China can develop its industries by leveraging the economies of scale based on the world’s largest domestic market. In this situation, China may have thought there is no longer a need to delay challenging dollar hegemony.

By playing the dollar hegemony challenge card, which was considered the last card against the US, the 'strong versus strong' structure between the US and China is becoming certain, but the position of South Korea, caught in the middle, is becoming increasingly difficult, which is worrisome.

Jung In-gyo, Professor, Department of International Trade, Inha University