The global currency pattern is reshuffled: the rise of the RMB and the hegemony of the US dollar

After the Russian-Ukrainian conflict broke out in 2022, the United States imposed unprecedented financial sanctions on Russia, excluding it from the US dollar settlement system. However, this financial nuclear bomb had an unexpected counter-the global monetary system dominated by the US dollar began to show obvious cracks, and its stability was facing unprecedented challenges. The crisis of hegemony currency

The current global monetary system is undergoing profound changes. The US dollar's status as the world currency is no longer stable, which is mainly due to three major factors: the scale of US government debt is snowballing, the risk of collapse of the petrodollar system, and the damage to the Federal Reserve's monetary policy credibility. At the same time, the euro and the yen are struggling due to their respective structural problems - the euro zone is deeply trapped in high debt quagmire, while Japan is trapped in the long-term deflationary pressure caused by aging population.

It is in this context that the RMB seized the historical opportunity and made its mark on the international financial stage through a series of international cooperation and opening-up measures. From the promotion of the Belt and Road Initiative to the signing of local currency swap agreements with many countries, the continuous improvement of the RMB Cross-border Payment System (CIPS) has laid a solid foundation for the internationalization of the RMB. RMB internationalization: From following to leading the way. In September 2023, the Governor of the People's Bank of China Pan Gongsheng released a set of exciting data at a press conference: the RMB has jumped to become the largest settlement currency in China's foreign trade, and also became the world's third largest trade financing currency and payment currency. In the International Monetary Fund Special Drawing Rights (SDR) currency basket, the RMB's weight has increased to 12.28%, firmly ranking third, second only to the US dollar and the euro. This milestone achievement means:

- The RMB has officially surpassed the British pound and became one of the top three payment currencies in the world - In the cross-border trade of Chinese companies, the RMB settlement ratio exceeds the US dollar for the first time - China's global competitiveness is transforming into the international attractiveness of the RMB. What is more worthy of attention is that this change reflects a deep transformation in the international economic and trade pattern. As China's manufacturing position in the global supply chain becomes increasingly consolidated, overseas companies have to reserve more RMB to purchase Chinese goods. This trade-driven currency internationalization path is exactly the same as the logic of the rise of the US dollar through the petrodollar system back then.

As of June 2023, the total asset size of China's banking industry has reached 470 trillion yuan, which is the world's largest financial scale, which provides a solid support for the internationalization of the RMB. At the same time, the pilot promotion of digital RMB (e-CNY) has also opened up new channels for cross-border use of RMB. US dollar hegemony: an empire in the setting sun? When the RMB is advancing rapidly on the international stage, the US dollar is in an unprecedented dilemma. The Federal Reserve is in a dilemma between resisting inflation and maintaining growth, and monetary policy is in a dilemma. Since the disintegration of the Bretton Woods system and the outflow of US manufacturing, the global financial focus has quietly shifted eastward. Although the United States has maintained its technological and financial hegemony over the past two decades by relying on its innovation advantages in Silicon Valley, China's breakthrough progress in 5G, artificial intelligence, new energy and other fields is changing this pattern. Especially after the outbreak of the Ukrainian crisis, the limitations of the US military deterrence were fully exposed - the decisive victory was still not achieved with the support of dozens of countries, which shook the military basis of the dollar's hegemony.

Changes in the situation in the Middle East are more symbolic. Once upon a time, the United States established the petrodollar system through the Gulf War and the Iraq War. But now, the United States is unable to deal with the Houthi armed forces in Yemen, and Middle Eastern countries are seeking to get rid of the U.S. influence. Oil-producing countries such as Saudi Arabia have begun to accept RMB settlement of oil trade, which is a waste of money against the US dollar. History is always surprisingly similar. The global hegemony of the 19th century ended with the decline of the British Empire. Now, the dollar is likely to be repeating the mistakes of the pound. Although the US dollar will remain the main reserve currency in the short term, its era of dominance is over. In the future, the international monetary system is more likely to show a strong diversification pattern, and the RMB is undoubtedly one of the most promising competitors.

In this monetary war without gunpowder, China needs to maintain strategic determination, continue to deepen financial reform and opening up, and improve the market-oriented, law-based and internationalized business environment. The road to internationalization of the RMB is still long, but the direction has been clear and the pace is accelerating. The prelude to the century-long changes in the global monetary system may have just begun.