China doesn’t need to de-throne the dollar to win global currency war

Every June, policymakers, regulators, bankers, investors, and financial executives gather in Shanghai for the Lujiazui Forum, China‘s premier financial policy conference. If Davos is where global elites discuss the future of the world economy, Lujiazui is increasingly where Beijing signals how it intends to shape that future to serve its own interests. As Americans, despite all the ways that our current focus is divided, I believe that this year’s forum deserves our attention.

At this year’s Lujiazui Forum, Chinese officials unveiled a series of measures designed to expand offshore renminbi (RMB) finance, deepen Shanghai’s role as an international financial center, create new liquidity facilities for foreign central banks and sovereign investors, expand cross-border RMB trading, and further open portions of China’s financial sector to international participation.

It is true that we have heard much of this before and, for skeptics and many observers, it is understandable if there are doubts about its sincerity or achievability. Is China finally ready and serious about posing a challenge to the U.S. dollar? The answer is that China is unquestionably serious about challenging aspects of dollar dominance, but it is also the wrong question.

I would argue that the world’s focus should not be on whether China will achieve its very real goal of having the renminbi replace the dollar. The world should focus more on the fact that Beijing continues, bit by bit and step by step, to methodically build the financial infrastructure necessary to reduce its dependence on a dollar-centric global system and create alternatives to American financial power for other countries. In other words, China is serious, but it may not be able to achieve its goals, at least not quickly. What it is doing, however, is positioning itself as a serious contender and disruptor of dollar dominance.

This is not primarily a monetary story. It is a geopolitical one.

For nearly eighty years, the United States has enjoyed extraordinary advantages from the dollar’s central role in the global financial system. Dollar dominance has provided Washington with tools of statecraft that previous great powers could scarcely imagine. The United States can impose sanctions, restrict access to dollar clearing, shape international compliance standards, influence capital flows, and leverage its position within the world’s financial architecture to advance national security objectives. China understands this reality as well as anyone and, like many countries, has bristled at this enormous concentration of power for decades.

Today, it is in a better position than ever before to do something about it.

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