In this article, part of our series on the possible futures of the US dollar supremacy, we focus our attention on the scenario “The Rise of the Renminbi”, which we deem more interesting in the way it would unfold. In the previous article, we highlighted three different main lead scenarios that could potentially describe the developments that will take place in the future, “The Rise of the Renminbi” being one of them.

With this series, trying to understand the possible futures of the US dollar supremacy, we analysed the currency functions (medium of exchange, store of value, unit of account) that make the dollar the necessary currency together with the challenges looming over the petrodollar system, the perspective of the renminbi as a leading international currency and the possible impacts of cryptocurrencies over the international monetary system, before turning to scenarios.

The way we present below the scenario “The Rise of the Renminbi” focuses on dynamics and points out main critical uncertainties. Each major uncertainty leads to two possible phases or sub-scenarios in our main scenario. We here gives the narrative for only one branch of the set of scenarios,the branch on the left hand side, as depicted on the graph.scenario, Red (Team) Analysis Society, warning, strategic foresight, US Dollar supremacy, US Decline, trade war, China, Renminbi The other possible sub-scenarios and phases (not detailed here) are in grey. The many impacts at each stage are also not detailed here, as the choice of which one(s) to underline depends upon the interests of the actor for which the scenarios are built. (Upload as a pdf – Scenario 2 2 Rise of the Renminbi - Red (Team) Analysis Society graph (pdf) – Members Only: Login / Becomes a Member)

Scenario 2.2: The Rise of The Renminbi 

Opening the Stage: US Protectionism

The most echoed global economic news over the first months of 2018 was US President Donald Trump’s decision to impose 25% and 10% tariffs respectively on imported steel and aluminium (Jeremy Diamond, Trump says US will impose steel and aluminium tariffs, CNN, 1 March 2018). This followed a protectionist pattern that had already envisaged the imposition on tariffs on solar energy cells and panels (30 percent progressively falling to 15 percent) and washing machines (20 percent and going up to 50 percent) (Ana Swadon and Brad Plumer, Trump Slaps Steel Tariffs on Foreign Machines and Solar Products,The New York Times, 22 January 2018), the decision to pull the United States out of the Trans-Pacific Partnership (TPP) (Eric Bradner, Trump’s TPP withdrawal: 5 things to know, CNN Politics, 23 January 2017) and the threats to withdraw from the North American Free Trade Agreement (NAFTA) with Canada and Mexico (Martin Pengelly, “Trump threatens to terminate Nafta, renews calls for Mexico to pay for wall”, The Guardian, 27 August 2017).

Shock waves were felt all around world. China lashed out at Trump’s decision (Wayne Ma, “China Strongly Opposed to Trump’s Steel, Aluminum Tariffs”, The Wall Street Journal, 9 March 2018) while Germany’s Angela Merkel sharply criticized the US economic plan (“Merkel slams Trump’s import tariffs as unlawful”, Reuters, 21 March 2018) and France’s Emmanuel Macron warned against the perils of “economic nationalism” (Leigh Thomas, “Macron urges WTO action against Trump’s steel tariffs, calls them economic nationalism”, Business Insider, 5 March 2018). India also did not welcome Trump’s tariffs (Kiran Stacey and Jyotsna Singh, Steel tariffs strain India’s ties with Trump, Financial Times, 18 March 2018).

Observers and commentators harshly criticized the US Administration resolution. Martin Wolf, for example, wrote that this was “likely to be the beginning of the end of the rules-governed multilateral trading order that the US itself created” (Martin Wolf, “Donald Trump’s trade follies presage more protectionism”, Financial Times, 6 March 2018). Undermining the post-World War II global trading system (Keith Johnson, “Trump Opened Pandora’s Box with Tariffs”, Foreign Policy, 14 March 2018) Washington had always protected and promoted, moreover, could have represented a significant blow to America’s soft power as the indispensable nation. These developments could have proven to be decisive for the future of the US dollar supremacy as the world’s reserve currency. The dollar market, in fact, was bearish as the lowest number of long dollar positions in four years could be observed (John Ainger, Bloomberg, One of Europe’s Biggest Funds is Betting on the Dollar, 22 March 2018).

The situation was developing fast. As the U.S. Trade Representative had concluded that China violated intellectual property norms (Patrick Gillespie, “Why Trump’s tariffs on China are a big deal”, CNN Money, 22 March 2018), President Trump was then expected to impose “$50 billion of tariffs against China over intellectual-property violations” (Andrew Mayeda, Jennifer Jacobs and Saleha Mohsin, “Trump Plans to Impose $50 Billion in China Tariffs, Source Says”, Bloomberg Politics, 22 March 2018) on sectors like robotics, aerospace, maritime and modern rail equipment as well as electric vehicles, and biopharma products (Shawn Donnan, “Trump to slap tariffs on $50bn of imports from China”, Financial Times, 22 March 2018). This increased the chances of a Chinese retaliation (id.) aiming at agriculture, aircraft and software (Steve Matthews, Alan Bjerga and Andrew Mayeda, “Here Are U.S. Targets Most Vulnerable to China Trade Retaliation, Bloomberg, 22 March 2018) and, therefore, the perspectives of a trade war breaking out. According to US Trade Representative Robert Lighthizer, farmers, who overwhelmingly voted for Trump in 2016, “could bear the brunt of retaliation” (Toluse Olorunnipa, “Trump Country in Greatest Peril as China Tariffs Risk Trade War”, Bloomberg, 23 March 2018).

Sub-Scenario 2.2.1 The trade war with China, old US allies shift towards Beijing.

Washington decides to “impose restrictions on investment from China and possibly even new limits on visas for Chinese nationals” (Shawn Donnan, “Trump is about to launch a trade war with no way out”, Financial Times, 21 March 2018), contributing to exacerbate tensions.

Indeed, as a result Chinese companies are barred to invest in “technology sectors” like semiconductors and “so-called 5G wireless communications” (Andrew Mayeda, Saleha Mohsin and David McLaughlin, U.S. Weighs Use of Emergency Law to Curb Chinese Takeovers, Bloomberg Politics, 27 March 2018). China has to retaliate not to lose its credibility as the only possible competitor of the United States. It therefore continues to enhance its economic cooperation not only with traditional US foes, like Russia, but also with allies like Australia, Japan, South Korea, the ASEAN countries and even the EU. All of these countries, in fact, are worried by Trump’s assertiveness and look at new trade partnerships. Washington responds imposing further tariffs and boosting home production to satisfy demand.

Sub-Scenario 2.2.1.1 The U.S. completely abandons free trade

The US therefore abandons global free trade and confidence in the dollar among international investors will be decisively undermined (Li Wei, Dollar distress could boost yuan internationalization, Global Times, 13 March 2018). The US trades less with the rest of the world; as a consequence, reduced dollar usage undermines the position of the dollar as the main reserve currency (id.).

Moreover, Trump’s erratic domestic and foreign policies do not relent, putting further downward pressure on the dollar. The greenback cannot trusted as usual as investors find impossible to predict the US President’s decisions with a reasonable degree of confidence. Uncertainty is exacerbated given by a series of events, chief among them the investigation conducted by special counsel Robert S. Mueller III, who had already arrived at the point of subpoenaing the Trump Organization (Michael S. Schmidt and Maggie Haberman, “Mueller Subpoenas Trump Organization, Demanding Documents about Russia”, The New York Times, 15 March 2018).

The Trump Administration continues to weaken the USD, creating fertile ground for the wide international adoption of other currencies.

Sub-Scenario 2.2.1.1.1 China takes the chance and successfully opens up.

This paves the way for China to accelerate the internationalization of the renminbi.

Aware of the possibilities that US policies open, Beijing exploits the circumstances and promotes the international use of the renminbi through its Belt & Road Initiative (BRI). The yuan will now be the official currency of every BRI transaction and China will “challenge the U.S. dollar’s status as the premier mode of global exchange” (Robert Daly and Matthew Rojansky, “China’s Global Dreams Give Its Neighbors Nightmares”, Foreign Policy, 12 March 2018). This is of course coherent with Chinese President Xi Jinping’s grand vision: “a new type of great power relations” with China playing an increasingly important role (Kevin Rudd, “What the West Doesn’t Get About Xi Jinping”, The New York Times, 20 March 2018).

Beijing, moreover, starts implementing the reforms (Leonardo Frisani, “The Renminbi on the Tracks of the U.S. Dollar?”, The Red (Team) Analysis Society, 11 December 2017) that help expanding the redback’s, and therefore China’s, stance on the global arena.

The new governor of People’s Bank of China, Yi Gang, will continue on the reforming path traced by his predecessor, Zhou Xiaochuan, who managed to shape an aggressive financial reform agenda, including liberalisation of interest rates and the exchange rate (Logan Wright, China’s central bank chief will owe a debt to Zhou Xiaochuan, Financial Times, 14 March 2018).

During the first period of his tenure, the new governor takes “charge of efforts to liberalise China’s exchange rate and attract greater foreign investment into China’s capital markets, especially the bond market” (Gabriel Wildau, Lucy Hornby and Tom Mitchell, “China names Yi Gang as new central bank governor”, Financial Times, 19 March 2018).

Beijing’s seriousness on reforms had already been highlighted by the appointment of Liu He, Xi Jinping’s top economic advisor, as Vice Premier as he is set to “head the recently created Financial Stability and Development Commission” (Lucy Hornby and Tom Mitchell, China’s Liu He takes broad economic role as vice-premier, Financial Times, 19 March 2018).

The administration led by Xi Jinping continues strengthening financial supervision, as spearheaded by the merger of the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC), a measure also praised by Moody’s (Xie Jun, “China to combine CIRC, CBRC”, Global Times, 13 March 2018). The new-born institution finally includes the China Securities Regulatory Commission (CSRC) at some point (id.). Facts prove Zhou Xiaochuan true as he had previously stated that “tightened management does not mean that opening-up in the financial sector will be put on hold” (id.).

As a result, the redback’s international use is strongly encouraged and indeed international investors are more and more attracted by China’s financial markets.

Sub-Scenario 2.2.1.1.1.1 The dollar falls with the petrodollar.

Furthermore, China builds on already present market dynamics and put an end to the petrodollar system.Oil trade, in fact, is progressively settled in currencies other than the US dollar (Li Wei, id.), with the renminbi taking the lion’s share. Indeed, US oil imports will continue their long-term decrease (U.S. Energy Information 2017) and China continues to be the world’s top oil importer.

Beijing builds upon the initial launch of its renminbi-denominated oil futures on 26 March 2018, a bid to challenge dollar-denominated Brent and West Texas Intermediate (WTI) (Tom Hancock, “China launches oil futures to stake claim on its own benchmark”, Financial Times, 26 March 2018).It was Beijing’s first futures contract that could be traded by foreign institutions not already present in China, “representing Beijing’s latest step towards financial opening and to promote global use of its currency” (id.). This move, moreover, allowed Beijing to exert increasing influence over the oil futures market, which moves trillion dollars per year, making the renminbi a fundamental player in the global currency market (Anjli Raval, “China seeks to extend oil market clout with new contract”, Financial Times, 25 March 2018).

China has now greater leverage on producers (Leonardo Frisani, Challenges looming over the petrodollar system, The Red (Team) Analysis Society, 20 November 2017), which, in turn, increasingly makes room for oil trade being increasingly settled in yuan, in a virtuous cycle, from China’s point of view.

The collapse of the petrodollar system, at the heart of the trade function which was instrumental in “compelling” other countries to hold US dollars (Leonardo Frisani, Towards the end of the US Dollar Supremacy? How Currency Internationalization Impacts State Power, The Red (Team) Analysis Society, 30 October 2017), is a fatal blow to the US dollar’s function as the global reserve currency, already weakened by Trump’s anti-free trade policies and the increasing relevance of Chinese financial markets.

 

The US Dollar loses its stance as global reserve currency, replaced by the renminbi as China is now at the centre of Eurasian trade exchanges and financial movements.

CONCLUSION

According to this scenario, the bases for the end of the US Dollar domination over the global monetary systems are being laid in this very moment. Trump’s unorthodox trade policies and erratic behaviour, the collapse of the petrodollar and China’s opening up may well prove to be a perfect storm. This may favour the rise of the yuan a truly global currency, reflecting China’s economic and geopolitical centrality over the global stage.

Many factors, however, could make this train derail. We have delineated some of them to give an idea of the wide number of possible futures we could be faced with. If you need more detailed analyses, do not hesitate to drop us a message.

About the author:  Leonardo Frisani (MA Paris) focuses currently on challenges to the US Dollar supremacy. Beyond that, his specialisation is in European and Russian history, and his main interests are in geopolitics, macroeconomics, climate change and international energy.

Main Refences

Ainger, J. (2018), Bloomberg, One of Europe’s Biggest Funds is Betting on the Dollar, 22 March 2018.

Bradner, E. (2017), Trump’s TPP withdrawal: 5 things to know, CNN Politics, 23 January 2017.

Daly, R. and Rojansky, M. (2018), “China’s Global Dreams Give Its Neighbors Nightmares”, Foreign Policy, 12 March 2018.

Diamond, J. (2018), “Trump says US will impose steel and aluminium tariffs”, CNN, 1 March 2018.

Donnan, S. (2018), “Trump is about to launch a trade war with no way out”, Financial Times, 21 March 2018.

Donnan, S. (2018), “Trump to slap tariffs on $50bn of imports from China”, Financial Times, 22 March 2018.

Frisani, L. (2017), Towards the end of the US Dollar Supremacy? How Currency Internationalization Impacts State Power, The Red (Team) Analysis Society, 30 October 2017.

Frisani, L. (2017), Challenges looming over the petrodollar system, The Red (Team) Analysis Society, 20 November 2017.

Frisani, L. (2017), “The Renminbi on the Tracks of the U.S. Dollar?”, The Red (Team) Analysis Society, 11 December 2017.

Gillespie, P. (2018), “Why Trump’s tariffs on China are a big deal”, CNN Money, 22 March 2018.

Hancock, T. (2018), “China launches oil futures to stake claim on its own benchmark”, Financial Times, 26 March 2018.

Hornby, L.  and Mitchell, T. (2018), China’s Liu He takes broad economic role as vice-premier, Financial Times, 19 March 2018.

Johnson, K. (2018), “Trump Opened Pandora’s Box with Tariffs”, Foreign Policy, 14 March 2018.

Jun, X. (2018), “China to combine CIRC, CBRC”, Global Times, 13 March 2018.

Ma, W. (2018), “China Strongly Opposed to Trump’s Steel, Aluminum Tariffs”, The Wall Street Journal, 9 March 2018.

Matthews, S., Bjerga, A.  and Mayeda, A. (2018), “Here Are U.S. Targets Most Vulnerable to China Trade Retaliation, Bloomberg, 22 March 2018.

Mayeda, A., Jacobs, J.  and Mohsin, S. (2018), “Trump Plans to Impose $50 Billion in China Tariffs, Source Says”, Bloomberg Politics, 22 March 2018.

Mayeda, M., Mohsin, S. and McLaughlin, D. (2018), U.S. Weighs Use of Emergency Law to Curb Chinese Takeovers, Bloomberg Politics, 27 March 2018.

Olorunnipa, T. (2018), “Trump Country in Greatest Peril as China Tariffs Risk Trade War”, Bloomberg, 23 March 2018.

Pengelly, M. (2017), “Trump threatens to terminate Nafta, renews calls for Mexico to pay for wall”, The Guardian, 27 August 2017.

Raval, A. (2018), “China seeks to extend oil market clout with new contract”, Financial Times, 25 March 2018

Rudd, K. (2018), “What the West Doesn’t Get About Xi Jinping”, The New York Times, 20 March 2018.

Schmidt, M. S. and Haberman, M. (2018), “Mueller Subpoenas Trump Organization, Demanding Documents about Russia”, The New York Times, 15 March 2018.

Stacey, K. and and Singh, J. (2018), Steel tariffs strain India’s ties with Trump, Financial Times, 18 March 2018

Swadon, A. and Plumer, B. (2018), “Trump Slaps Steel Tariffs on Foreign Machines and Solar Products”, The New York Times, 22 January 2018.

Thomas, L. (2018), “Macron urges WTO action against Trump’s steel tariffs, calls them economic nationalism”, Business Insider, 5 March 2018.

U.S. Energy Information Administration, Annual Energy Outlook 2017, 5 January 2017.

Wei, L. (2018), Dollar distress could boost yuan internationalization, Global Times, 13 March 2018.

Wildau, G., Hornby, L. and and Mitchell, T. (2018), “China names Yi Gang as new central bank governor”, Financial Times, 19 March 2018.

Wolf, M. (2018), “Donald Trump’s trade follies presage more protectionism”, Financial Times, 6 March 2018.

Wright, L. (2018), China’s central bank chief will owe a debt to Zhou Xiaochuan, Financial Times, 14 March 2018.

Leave a Reply

Your email address will not be published. Required fields are marked *