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Asian Century And Petro-Yuan: Is China All Set To Trump Dollar’s Hegemony In Global Trade?

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Osama Rizvi in this article argues that the Chinese Yuan is fast catching up with the US dollar in global trade. While there is still a huge gap to bridge, he believes that with China’s massive population and guaranteed future progress, there are opportunities that it can capitalize upon and trump dollar’s hegemony.

Many political and economic observers have started to point towards the revival and subsequent dominance of the Asian continent, primarily driven by 7 countries: PRC, India, Indonesia, Japan, Republic of Korea, Thailand and Malaysia. The countries, in terms of economics and trade, will probably drive the growth in the neighboring region and subsequently throughout Asia in the future. Interestingly, facts, figures, and trends also signal in the said direction. As the Eastern hemisphere coalesces into a larger economic unit led by China, one might ask the prospects of Yuan as a rising currency.

The Asian region used to be the hub of economic activity with trade in spices, silk, ceramics, and other goods. But then after the Columbian Epoch (1492), as Vasco Da Gama and Christopher Columbus, almost at the same time, rounded the Cape of Good Hope and the latter landed in New World, this began to change. However, now we are witnessing the trend being shifted again as the graph below shows.

Source: Asian Century 2050 Summary

For context, consider the following: “Asia is in the middle of a historic transformation” notes a recently released report. Assuming that the region continues to grow at the current pace, we can see per capita income in Asia increasing six-fold (in purchasing power parity terms) matching the European level by 2050. Its share of global GDP will rise to 52 percent by the same time – an increase that is double the current levels. And, over the next quarter-century, GDP growth will further increase from $17 trillion in 2010 to $174 trillion in 2050 – a figure that is roughly half of global GDP. The population of East Asia is estimated to be doubled as well. We can already see a huge transformation in place as various billionaires in Asia take over that of the West and Fortune 500 now holds more Asian firms than ever. In 2017 the list had about 197 firms from the Asian more than any other continent! In 2019, the total number of Chinese companies in the list was just short of that of the US with the former at 120 and the latter at 126.

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Considering the above scenario, the role of China is extremely relevant and important. If there is going to be an Asian century it will, evidently, be led by China. With a peerless demographic “scale” of about 1.3 billion and a rising economy estimated at $15 trillion (the second largest in the world), it is well poised to take that role. These compelling facts suggest an important question: What role will the Chinese Yuan play and, more specifically, what is the potential for the Chinese Yuan to eventually eclipse the US Dollar and dominate international trade.

Yuan’s share in global central bank reserves increased to 1.89 percent in 2019 while that of the dollar fell. Central banks all around the world are diversifying their reserve mix. However, Yuan is still far behind from even coming at par with the dollar in terms of international payments, let alone surpassing it. Only 1.61 percent of payments “domestic and cross-border” were made in Renminbi, reported Swift.

The “Petro Yuan”

Another important avenue for the Yuan to demonstrate its power and potential is the global crude oil market. Last year China launched its first-ever Yuan-denominated oil futures contract.

For a start, it is not performing that bad with yuan-denominated oil futures overtaking that of dollar ones in Singapore and Dubai. Companies like Glencore and Trafigura participated in trading which shows that even the western oil businesses might also be interested in having a Yuan based oil future contract. As China is the largest importer of oil and is expected to remain so with its huge population and economic progress in the future, it makes absolute sense that this idea has some weight.

However, everything is not in China’s favor and there may be significant downsides as well. With global crude oil markets priced at $14 trillion and the dollar being used for pricing for almost 70 percent of it, the prospects of the Yuan even in oil trade starts to fade away a little.

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A Different World

However, the chances of China’s Yuan, if not taking over, then increasing its share in international trade continues to increase as we step into a different future. So what are the implications? Consider Chinese President Xi’s Belt and Road Initiative and its obvious connection to the concept of an impending “Asian Century.” The future will see an unprecedented amount of economic and therefore political cooperation and collaboration amongst the countries that will be members of the Belt and Road Initiative. What will consolidate the alliance is the fact that pertains to the growth of most of the individual countries as well, giving a reason to trade and consume more goods, energy, and rising demand as new middle-classes emerge. Iran and Russia both irritated by US sanctions, Latin American countries (also part of BRI) trying to raise living standards, Eastern Europe drifting further East – all of these are potential opportunities for China to capitalize on.

In such a case the prospects of the Chinese Yuan constituting a major share of trade between these countries seems practical and promising. But China will have to build and strengthen what is called financial infrastructure to support such a shift if and when it happens. Asia, and therefore China, needs to innovate and open up its financial and capital markets. However, it should also take stock from the Asian Financial Crisis 1998 and avoid too much reliance on “liberalization” peddled by many of the mainstream international institutions.

This is a tremendous opportunity for China to give a head-start to its currency and strengthen another frontier, this time: currency markets.

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