Clash of the Money Giants: China Lays the Groundwork to Rival the Dollar

The arithmetic of money is incorruptible: when it comes to international settlement systems, the pricing of commodities and energy, and access to the credit system, the U.S. dollar still reigns unchallenged. Eighty-nine percent of all foreign exchange transactions are conducted in greenbacks — central banks, commercial banks, and other capital pools hold roughly 57 percent of global currency reserves in U.S. dollars.

Global banking cannot function without the dollar standard and its settlement systems — everything is calibrated to the dollar, from banks’ settlement systems to the benchmark yield of the ten-year U.S. Treasury note to the petrodollar, the pricing mechanism for the world’s most vital commodity: oil. On top of that, the still-dominant SWIFT system forces large swaths of the business world, of states, and of central banks into the dollar network. Exclusion from this network amounts, in many cases, to economic death — the ultimate sanctions hammer in the hand of any American president.

Russia recently felt the full weight of this dollar power. Cut off from SWIFT, it took a maximum political effort to stay afloat in international trade through alternative payment mechanisms. Yet Russia is an exception: it sits atop natural resources worth 75 trillion U.S. dollars — a resource giant that hardly anyone in the world can do without, except perhaps the EU, which seriously believes it can wean itself off Russian gas.

With this experience of geopolitical fragility in mind, China’s political leadership decided, over a decade ago, to establish a parallel payment and store-of-value system. Beijing had time to study the elements that made up the dollar’s network effect. Aside from the omnipresence of the U.S. military around the world, one might cynically add, it was the standard that grew out of the Bretton Woods system after World War II that fulfilled the following core functions: direct clearing of transactions in a single currency, the U.S. dollar; store of value in the interbank sphere and as collateral in the form of dollar-denominated government bonds; and settlement systems operating on the same standard.