Why did the Chinese Communist Party’s flagship publication publish at the weekend comments made by Xi Jinping back in 2024?
The obvious answer, given that their publication would have had to be made with Xi’s approval, is that he sees an opportunity as the “Sell America” trade gains traction.
The remarks published in Qiushi magazine focus on the role China’s renminbi can play in global trade and foreign exchange markets, with Xi posing the rhetorical question of “What constitutes a strong financial nation?”
“First, it should have a powerful currency, widely used in international trade, investment and foreign exchange markets, holding the status of a global reserve currency,” he answered.
To achieve those objectives, China would need a powerful central bank capable of effective monetary management, globally competitive financial institutions and international financial centres able to attract global capital and exert influence over global pricing, he said.
Xi’s ambition of internationalising China’s currency isn’t recent or secret.
In recent years, it has accelerated its push to have the renminbi used as at least one side of trade transactions and has been doing that increasingly in trade with Russia, Iran, India, the Middle East and South American and African countries. About a third of its bilateral trade is now settled in renminbi.
The recent stand-off with BHP, where China refused to allow the company to land some of its iron ore unless the trade was settled in renminbi, was a sign of a new willingness to use strong-arm tactics to coerce counterparties into using its currency.
It’s also built the payments infrastructure – its Cross-Border Interbank Payment System – to clear and settle international transactions in renminbi, to promote its internationalisation and to reduce reliance on the US dollar and the dominant US-dominated SWIFT financial messaging system.
So, why dust off an old speech to articulate a previously largely unspoken but widely recognised ambition?
It’s because the US and the US dollar appear vulnerable.
Donald Trump’s chaotic policymaking, the international hostility and distrust generated by his trade war on the rest of the world, his assaults on multinational and domestic institutions, his threats to seize the territory of a NATO ally, his kidnapping of another country’s president, his disdain for the US Constitution and domestic laws, his attack of the Federal Reserve board’s independence, the accelerating build-up of US government debt and a fear that the administration is going to monetise that debt through money-printing and dollar depreciation are causing significant levels of distrust in America and its future.
The demonstrated effect of the US-led seizure of Russian foreign exchange reserves at the onset of the war in Ukraine is another reason for foreign governments and their central banks to look for alternatives which, at the moment, appear to be largely a switch from US assets to gold. Central banks have doubled their purchases of gold since the seizure of Russia’s reserves on 2022.
In the post-war era, the US dollar and the US Treasury securities market have been regarded as the world’s “safe havens”, but their status has been eroding since Trump first took office in 2017 and has deteriorated in the first year of his second term.
It is reflected starkly in a depreciation of the dollar approaching 11 per cent against the basket of America’s major trading partners since Trump’s inauguration last year.
Last week, Trump said he welcomed that decline.
“I think it’s great. Look at the business we’re doing. The dollar’s doing great,” he said. A weaker dollar makes US exports more competitive abroad.
His Treasury Secretary, Scott Bessent, immediately tried to walk those comments back, saying America remained committed to a strong-dollar policy.
“If we have sound policies, the money will flow in,” he said. That is, of course, a big “if,” given the nature of Trump’s policies to date.
Xi’s ambition of internationalising China’s currency isn’t recent or secret.
A concern for foreign investors in the US and central banks holding US dollar-denominated reserves is that the chairman of Trump’s council of economic advisers and his temporary appointee as a Fed board governor, Stephen Miran, authored a paper in 2024 which set out how to boost US exports and the US manufacturing sector, narrow its trade deficit and lower the cost of US government debt.
The key to the “Mar-a-Lago Accord”, as it has become known, is a controlled depreciation of the US dollar.
While Miran seems to have envisaged a grand agreement with other countries to intervene in markets to achieve that objective, it’s been happening anyway, in an uncontrolled fashion – which might explain why Bessent was so quick to try to distance himself and US Treasury policy from Trump’s comments.
For Miran’s thesis to work, if it could work, dollar depreciation would have to occur in a measured way over a significant period.
Igniting an exodus from US markets at a time when US government debt has surpassed $US38 trillion ($54.5 trillion) and is climbing – and when nearly half that debt will now roll over within two years because Bessent has replaced maturing longer-term bonds with lower interest cost Treasury bills and notes – would be a potentially destabilising and potentially crisis-inducing exercise.
With the US governance apparently dysfunctional, its traditional allies unsettled and fearful, investors and governments starting to reduce their exposure to Treasury markets and an economy whose settings are no longer regarded as risk-free, Xi senses a moment.
Sensing it is one thing. Taking advantage of America’s moment of vulnerability is another.
While the dollar’s share of foreign exchange transactions, trade and central bank reserves has been sliding, it still remains the dominant currency in global financial activity. It’s used in about 89 per cent of foreign-exchange transactions, about 60 per cent of global debt is denominated in dollars and 57 per cent of foreign exchange reserves are dollar-denominated.
In contrast, China’s currency is used in fewer than 9 per cent of foreign exchange transactions and constitutes only 1.93 per cent of global reserves. The euro has a stronger position, used in about 29 per cent of FX transactions and is the currency for about 20 per cent of the world’s official reserves.
To ever challenge the dollar as a reserve currency, China would need to make very significant changes to its policy settings, changes that would probably be unpalatable to the Communist Party.
A reserve currency needs to be completely freely traded, which requires an open capital account and a freely floating currency whose value is determined by the market. China has tight capital controls – cross-border transactions have to be approved by a government agency – and manages its exchange rate tightly to ensure its stability.
Xi isn’t going to relinquish control over his financial system so, even without the other features needed to achieve reserve currency status – transparent and trusted legal and judicial systems and deep and very liquid financial markets – his ambitions are unlikely to be realised within the forseeable future.
China, and Europe, can, however, keep chipping away at the dollar’s dominance and the effective subsidies of borrowing costs and the US standard of living that the rest of the world provides America, if only to reduce their own vulnerabilities to the Trump-driven shifts in America’s relationship with the rest of the world.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.