At the moment, China is the second largest economy in the world, preceded by the US. But it seems that the Chinese government wants to use the current recession as a chance to become the first. Launching a digital currency of its own is a crucial step in this plan. However, it’s yet unsure whether digital yuan will become the global transformative factor China wants it to be. Also, one mustn’t forget that the US Dollar remains the “top dog” among reserve currencies. True, it has been weakened by the coronavirus crisis. The question here is whether that weakness is enough to move it from the top position.
Unsurprisingly, the chance of it is slim.
What Is Digital Yuan and What Can It Do?
There has long been a lot of talk about how cryptocurrency can change the world of money once and for all. However, the crypto that exists today has yet to reach that level of acceptance. The main problem for that type of digital currency is that it’s only recognized as an acceptable payment method by a few vendors. In the majority of countries it has no legal status as a currency at all, and in many others it’s banned altogether.
However, despite that problem and other limitations of cryptocurrency, no one can deny the benefits it offers. But those benefits are unavailable as long as the digital currency has no legal status or backing by a big national bank.
If crypto did have such backing, it’s quite possible that it could transform the economy completely. And China seems to be trying to achieve exactly that.
Unlike bitcoin, ripple, and other coins, digital yuan is a cryptocurrency that will be released by China’s central bank. This means that it should have a status similar to fiat currency. Therefore, you’ll be able to make all kinds of payments with it.
This makes all the difference because this means that people will be able to use digital yuan freely. As such, this groundbreaking currency might fast become one of the world’s reserve currencies. This, in turn, means that it might as well be able to move the US dollar from its top spot.
Digital yuan has not been released yet, but trials are already afoot. If it does become available anytime soon, there is no doubt that China might gain a big advantage in the global economic race.
Can China Become the #1 Economy in the Wake of Coronavirus Crisis?
As mentioned before, China is not the biggest economy in the world. Yet. But it definitely has the potential to take that place. And it desperately wants the position judging by the China-US trade war. If it does achieve this goal, yuan might replace the USD as the world’s #1 reserve currency.
However, the coronavirus pandemic and crisis it caused made this global economic issue even more complicated. On one hand, the pandemic hit China extremely hard. The production level in the country dropped fast taking any semblance of economic stability with it.
Of course, China wasn’t the only country affected. Considering that a big part of the world’s intermediate parts manufacturing facilities are located in China, the lockdown caused by the pandemic affected all countries involved in other stages of manufacturing. The production rate of the entire planet has gone down.
And it will take a while to pick up and get back to normal. Even in China, where the pandemic started, factories aren’t back to 100% yet.
But in the meantime, China is recovering faster than any other country. Therefore, it might gain an edge it needed to take that first place in the global arena.
Why Digital Yuan Might Have a Chance Now
The main reason cryptocurrency is considered a safer option compared to fiat currencies is the fact that it can’t be fully controlled by the government. Simply put, it should be impossible to release more coins onto the market to control the inflation and liquidity as governments do with fiat currencies.
That’s a major concern now, in particular because FX markets have turned extremely volatile. The coronavirus recession has all but crushed emerging markets’ currencies already. And it’s not only them that are affected as even Pound Sterling showing much weaknesses. The global economic recession destabilized all currencies to some extent. Even the USD has suffered somewhat.
However, that situation is rapidly changing as the US dollar is regaining its strong position. Being the world’s reserve currency is what allows USD to achieve this. However, even that doesn’t protect the dollar from volatility.
Cryptocurrencies, on the other hand, should be all but invulnerable to it. As speculation with digital money isn’t as simple, it should be a safe haven for times of great economic instability. This is why one of the main selling points of bitcoin and other crypto is their use as a hedge against economic recession.
It’s the same with the dollar as it’s the #1 currency to use as a hedge. But with crypto, the situation should be even safer because digital currency shouldn’t be as affected by global economic fluctuations.
At least, this is the theory.
These things considered, should digital yuan enter the market, it should have the best of both worlds of currencies. It should have the benefits of mobility and stability of digital currencies. Yet it will have the functions of fiat money. With these advantages, it can become the world’s reserve currency pushing USD to the sidelines.
If Crypto Is So Great, Why Isn’t It Dominant Yet?
All that said, the US dollar is still the world’s currency #1. And nothing on the FX market can move it yet. It’s true that crypto might have some chance because of its inherent advantages. However, it doesn’t solve the issue of liquidity for banks during a crisis.
Also, crypto as it is now is severely limited. Bitcoin stands out as the most widely used cryptocurrency. However, even it didn’t fare well during this crisis. When the stock market crashed, the bitcoin value crashed along with it. The crypto is recovering now, but this situation has already proven that it can’t be the hedge investors hoped it to be. Therefore, the chances of bitcoin replacing the USD as a reserve currency are non-existent.
Digital yuan might introduce a great change by being a replacement for fiat currency. This will make it possible to avoid the majority of issues that currently prevent BTC from taking the spotlight.
The problem of coins now is that they are extremely volatile because investors mainly use them for speculation. It’s not surprising because there are no routes to use bitcoin for much else. A digital currency that replaces fiat currency won’t have this problem. Therefore, it shouldn’t be so volatile.
However, all that is merely in the realm of predictions today. The truth is that there isn’t a digital currency that has a “fighting chance”. Therefore, the USD is and will continue to be the top reserve currency in the world.
The only thing that can change this at the moment is a complete crash of the US economy.
In Conclusion: Digital Is the Future, But It’s Not Here Yet
Digital currency might be great in many ways, but it’s not yet developed enough to replace fiat currency. Not only does the technological base require more advancements to launch even a country-wide government-sanctioned crypto. There also needs to be a fundamental change in the policies regarding payments and finances.
The government of China might have made a bigger leap toward this goal. However, there isn’t digital yuan launched yet. Therefore, it’s impossible to predict what exactly will happen when it appears.
In the meantime, the global economy is in such turmoil that no currency, fiat or crypto, is safe from extreme volatility. But this situation is working out quite well for the dollar. That’s because regardless of the issues the world faces, USD is still the go-to currency in crisis.
Therefore, China’s ambition to topple the US dollar riding the coattails of the pandemic crisis seems rather hopeless. The dollar will remain strong because it’s people and businesses that make it so. This might not be the best solution for the global economy at the moment. This definitely isn’t the best situation for developing economies as in these countries USD is appreciating extremely fast.
However, this is the route that the world has been going for decades. Without any truly world-shattering changes, the dominance of USD is going to remain. The strengthening of China’s economy isn’t a threat to it at the moment.
Of course, this situation could change if China were to suddenly become the leading global economy. But this won’t happen unless the US economy is completely crushed and therefore out of the running altogether.
As things stand now, the US economy is struggling and it’s not doing the best among other developed countries. However, struggling doesn’t mean that it’s at risk of being demolished.
This means that digital yuan or any other currency will require a lot more than some handy benefits to try and beat the USD for its position as the top currency.
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