Digital Yuan will “Hardly Put a Dent” in US Dollar Dominance and its Role as Global Reserve Currency, Cornell Professor Claims

Eswar Prasad, professor of Trade Policy at Cornell University and senior fellow at the Brookings Institution, acknowledges that the Chinese digital yuan will improve the nation currency’s role as an international payment method. However, he clarified that it will “hardly put a dent” in the US dollar’s status as the world’s most dominant reserve currency.

In an Op-Ed published in Project Syndicate, Prasad recommends that the Chinese government should continue to upgrade its financial markets. He added that the $13 trillion economy should also ease or remove restrictions on capital flow, so that the country’s central bank digital currency (CBDC) and international payments system can be increasingly adopted, globally.

The Cornell professor pointed out that the Chinese yuan has made substantial gains during the past few years. The renminbi has become a more widely accepted form of payment and has, to a certain extent, served as a fairly decent reserve currency, Prasad argued. He added that these achievements may be attributed mostly to the struggling British pound and Euro, which previously had a more dominant presence in global markets.

He remarked:

“Even when the IMF added the renminbi to the four existing currencies in the SDR basket and gave it a 10.9% weighting, it was mainly the euro, the pound, and the Japanese yen that gave way, not the dollar.”

The People’s Bank of China (PBoC) is still responsible for actively managing the yuan’s exchange rate, Prasad clarified, while noting that this policy most likely won’t change “significantly” for now at least.

Prasad added that developing nations (like Pakistan) have established strong trade and financial relations with the Chinese government. He believes that some developing countries may begin to invoice and “settle their transactions directly” in the Chinese yuan and may even adopt the virtual yuan when it’s production version becomes available.

On August 14, 2020, the Chinese Commerce Ministry confirmed that it would be expanding its digital yuan pilot to Beijing, and also the nation’s Hebei and Tianjin provinces.

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