Dollar vs. Yuan: China President Xi Jinping challenges Donald Trump, questions domination of US currency

Beijing: Chinese President Xi Jinping has directly challenged the dominance of the dollar in the international economy. He called for making the Chinese currency, the yuan, a "strong currency." Xi said the yuan should be strengthened to the point where other countries would hold it as an "international reserve."

Currently, this status is held by the dollar. Xi's statement is being seen as a challenge to the dollar's supremacy. This clash between the world's first and second largest economies has profound implications for the world.

What does China want?

China, the world's second-largest economy after the US, is increasing the use of the yuan in international trade to reduce its dependence on the US dollar. Last year, it settled approximately one-third of its $6.2 trillion in foreign trade in its local currency.

In an article published on Saturday in the ruling Communist Party's leading theoretical journal, "Qiushi," Xi said China needs to build a "strong currency" that can be widely used in international trade, investment, and foreign exchange markets, and that can achieve global reserve status.

What is a global reserve currency?

A global reserve currency is a currency that governments, central banks, and global financial institutions around the world hold in large quantities in their foreign exchange reserves. This currency is used for international trade, investment, debt repayment, and global transactions. In simple terms, it is the world's "most reliable and most widely accepted" currency, which almost all countries stock up on for security.

The US dollar has been the world's leading global reserve currency since World War II. According to the IMF, the dollar's share of global foreign exchange reserves still remains around 58-60%.

Although Xi did not directly mention the US dollar in the article, excerpts of which were published by several media outlets, the Chinese president has been pushing for the yuan to become an international currency on par with the dollar since taking power in 2012.

Advertisement According to a report by the South China Morning Post in Hong Kong, Xi Jinping said that while China is one of the world's largest economies in terms of banking assets, foreign exchange reserves, and the size of its capital markets, it is overall "big but not strong." He emphasized that building a financial powerhouse would be a long-term endeavor.

What are China, Russia up to?

China, along with Russia, is promoting the Cross-Border Interbank Payment System (CIPS) as an alternative to the SWIFT international banking network.

As the largest buyer of Russian oil and gas, China has also increased the use of the yuan in bilateral trade with Russia.

According to reports, China has already entered into currency swap agreements with nearly 50 countries to facilitate trade in local currencies.

Over the past year, the yuan has generally strengthened against the dollar, although international investment banks say it is still undervalued relative to its long-term value.

Goldman Sachs analysts said in a January 5 report that the yuan may be trading at a discount of approximately 25 percent against the dollar.

What is SWIFT?

SWIFT is the world's largest and most important international payment messaging network. SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. It is a cooperative organization established in Belgium in 1973 and owned by its member banks.

Experts say the Chinese central bank prefers a strong currency but is cautious about allowing its value to appreciate too rapidly.

Beijing and Moscow are also pushing for a common BRICS currency and an alternative BRICS Pay payment system to rival SWIFT within the BRICS group. BRICS is now a group of 10 members, including Brazil, Russia, India, China, and South Africa, along with five new members.

This issue is expected to be raised at the BRICS summit to be held in India this year. US President Donald Trump has warned that he will impose heavy tariffs if the BRICS countries proceed with plans to challenge the dominance of the dollar.

The official news agency Xinhua, citing an article published in Qiushi, reported that Xi said China's financial development with Chinese characteristics not only follows the path of modern financial development but also possesses unique features tailored to China's national conditions, which distinguishes it from the Western financial development model.

President Xi emphasized that the fundamental characteristics of an economically strong country should be based on a solid economic foundation, possessing world-leading economic, scientific, technological, and overall national strength.

He added that the country should also possess several key financial elements, such as a strong currency and central bank, robust financial institutions and international financial centers, sound financial supervision, and a high-caliber team of financial talent.