How China aims to smash the US dollar dynasty

China is establishing itself as a major player in the Global South, previously known as the Non-Aligned Movement. Over the last few decades, it has become the world’s biggest creditor of developing countries.

That has prompted fears it will subjugate partners in “debt traps” and use this to establish a “hegemonic sphere of influence.” China’s economic position is so strong that it is now considered the main threat to the US dollar.

It is an influential member of the BRICS+ group, which also includes Brazil, Russia, India, and South Africa. This bloc is working to establish a multipolar world that challenges the hegemony of the West, specifically the leadership of the United States.

Without using the term “threat,” Washington now sees Beijing as the “most serious long-term challenge” to the international order. It is easy to understand why since China’s strategic objective is to end the supremacy of the geenback, the keystone of US hegemony.

World economy

As French economist Denis Durand explains in Guerre monétaire internationale: l’hégémonie du dollar contestée? or International currency war: the dollar’s hegemony challenged?:

In addition to the fact that several currencies are linked to the dollar by a fixed link or band of fluctuation, American currency is also used in many Third World and Eastern European countries, where it enjoys a much higher level of public confidence than do local currencies […] The United States is the only power that can incur foreign debt in its own currency.

The hegemony of the greenback over the world economy is reflected in its over-representation in the foreign exchange reserves held by the world’s central banks. It still outstrips other currencies even though there has been some erosion in this.

Despite a fall of 12 percentage points between 1999 and 2021, the share of the US dollar in the official assets of the world’s central banks remains fairly stable at around 58 to 59%.

It still enjoys widespread confidence, reinforcing its status as the global currency. US dollar reserves of the world’s central banks are invested in American Treasury bills, helping to reduce the cost of financing government debt and private investment in the United States.

Currency composition of official foreign exchange reserve in % terms

Yet, the income generated for the US economy by the dollar hegemony could also collapse like a house of cards. As Durand pointed out, “the hegemony of the United States […] is held together only by the confidence of economic agents around the world in the American dollar.”

There are two reasons why that could change. Firstly, as US Treasury Secretary Janet Yellen admitted in 2023 interview, Washington is unequivocally using its dollar as a tool to bend enemies — and some recalcitrant allies — to its will.

This could ultimately undermine the dollar’s hegemony. On the other hand, the US debt situation is a source of concern that could affect its attractiveness as a global reserve currency.

The greenback has been at the heart of the global monetary system since 1944, and even more so since the Bretton Woods Agreement in 1959. The system was based on gold with the greenback pegged at US$35 per ounce.

Gold standard

That changed on August 15, 1971, when because of inflation and the growing imbalances in the United States’ international economic relations, then President Richard Nixon announced the end of the dollar’s peg to gold.

Under the system, where gold was the guarantor of the currency, the US could only borrow according to the quantity of dollars in circulation and its gold reserves. Abandoning the gold standard gave the US free rein over its debt.

Last year, it reached more than $33.4 trillion, nine times the country’s debt in 1990. This astronomical figure continues to raise concerns about its long-term sustainability.

As US Federal Reserve Chairman Jerome Powell has pointed out, its debt is growing faster than the economy, making it unsustainable in the long term. This is a reality China clearly understands after off-loading massive amounts of American debt.

Between 2016 and 2023, China sold $600 billion worth of US bonds.

Evolution of US debt from 1980 to 2023

Yet, in August 2017, China was the United States’ largest creditor, ahead of Japan. It held more than $1.146 trillion in US Treasuries, almost 20% of the amount held by all foreign governments. Now, Beijing is the second-largest foreign holder with around $816 billion.

It is certainly no coincidence that before divesting itself of US bonds, Beijing first launched a gold pricing system in yuan. On April 19, 2016, the Shanghai Gold Exchange unveiled on its website its first “fixed” daily benchmark for gold at 256.92 yuan per gram.

This policy is part of China’s strategy to make gold a tangible guarantee of its currency. At the same time, Beijing continues to sell its US bonds. Between March 2023 and the same period in 2024, China dumped $100 billion in US Treasuries.

Benchmark currency

That was on top of the $300 billion China had already sold off during the past decade. Also, around a quarter of the US Treasuries sold in the past 10 years were converted into gold. China is now the leading producer and consumer of the precious metal.

Its appetite for gold was confirmed in 2010, with reserves rising to 1,054 tonnes from around 600 tonnes in 2005. A decade later, its stock of gold had almost doubled again to nearly 2,000 tonnes. By the end of 2023, China will have the sixth-largest gold reserve with 2,235 tonnes.

As a substitute for the dollar, gold enables China to store the gains from its large trade surpluses. With the Shanghai Gold Exchange, Beijing is seeking to strengthen the use of its currency abroad to establish the yuan as the benchmark currency for the global economy.

Zakaria Sorgho is a Senior Fellow at FERDI & ACET-Africa and Research Associate at CREATE, Université Laval in Canada.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.