Digital yuan doesn’t pose a threat to the hegemony of the dollar, says expert

Eswar Prasad, a professor of Trade Policy at Cornell University and a senior fellow at the Brookings Institution, believes that even though China’s digital yuan will enhance the renminbi’s role as an international payment currency, it will “hardly put a dent” in the US dollar’s status as the dominant currency.

In an opinion piece published in Project Syndicate, Prasad states that the Chinese government should keep reforming the country’s financial markets and remove restrictions on capital flow to put both China’s CBDC and national cross-border payments system in the global sphere to strengthen its adoption.

According to the professor, the renminbi has made significant gains in recent years, both as a means of payment and as a reserve currency. He says that this can be attributed mostly at the expense of currencies such as the Euro and the British Pound:

“Even when the IMF added the renminbi to the four existing currencies in the SDR basket and gave it a 10.9% weighting, it was mainly the euro, the pound, and the Japanese yen that gave way, not the dollar.”

The People’s Bank of China “still manages the renminbi exchange rate,” said Prasad, who also added that such policy doesn’t seem likely to change “significantly anytime soon.”

However, the professor clarified that as other developing countries have solid trade and financial links with China, they “might start to invoice and settle their transactions directly” in the national currency and could easily adopt the digital yuan when it’s launched officially.

China’s Commerce Ministry announced on August 14 that it will expand the trials of the nation’s central bank digital currency to include Beijing, as well as Tianjin and Hebei provinces.