Hank Paulson agrees with me that the advent of a Chinese CBDC, by itself, portends nothing for U.S. dollar dominance, and the additional elements required for the yuan to credibly challenge the dollar are numerous, monumental, and have nothing to do with digitization. He says this about seven different way in a recent article for Foreign Affairs:

That the dollar has maintained this stature for so long is a historic anomaly, particularly in the context of a rising China. The Chinese renminbi (RMB) has by far the greatest potential to assume a role rivaling that of the dollar. China’s economic size, prospects for future growth, integration into the global economy, and accelerated efforts to internationalize the RMB all favor an expanded role for the Chinese currency. But by themselves, these conditions are insufficient. And China’s much-touted successes in the realm of fintech—including its rapid deployment of mobile payment systems and the recent pilot project by the People’s Bank of China to test a digital RMB—will not change that. A central bank–backed digital currency does not alter the fundamental nature of the RMB.

These facts regularly lead pundits to opine that Chinese fintech dominance could soon jeopardize the dollar’s global status. That is not a serious concern—nor is it clear that the United States is actually falling behind in matters of fintech.

This is almost verbatim from my January post:

Although the Chinese central bank could launch a digital currency as early as this year, the headlines exaggerate how transformational it will actually be. Those who worry that this development might herald the end of U.S. dollar primacy misunderstand that while the form of money may be changing, its nature has not.

A digital RMB would still be a Chinese RMB. No one is reinventing money. The token used for transactions may be different, but China’s prospects for reserve currency status depend on the same set of factors that apply to the issuer of that currency. And although the Chinese government has promoted use of the RMB to settle trade transactions as part of an effort to internationalize its currency, oil and other major commodities are still priced in U.S. dollars.

What would China have to do to challenge the dollar?

Still, that the RMB can join the U.S. dollar as a primary reserve currency is not a foregone conclusion. To achieve such a status, China will need to reform its economy and develop its capital markets in ways which are difficult and involve complex domestic political considerations. Recent Chinese ambitions that required similar transformations—such as establishing Shanghai as a full-fledged global financial hub by 2020—have so far been deferred: a financial hub simply is not viable when capital controls are in place and the currency is not market determined. The same holds true for the RMB’s prospects as a major reserve currency.

Although a Beijing-backed digital currency in and of itself is unlikely to undermine the dollar’s supremacy, it could certainly facilitate China’s efforts to internationalize the RMB. In countries with unstable currencies, such as Venezuela, a digital RMB is an attractive alternative to the local currency. Chinese firms such as Tencent, which already have a sizable presence in developing countries in Africa and Latin America, could scale up their presence there, leading a future digital RMB to gain market share. This could help enhance the RMB’s global status and become part of a broader strategy to project Chinese economic and political influence abroad.

On the Venezuela point, I think Paulson is overlooking stablecoins. Venezuela will dollarize via stablecoins before it yuanifies. On this, though, he is spot on:

To be sure, the United States needs to take China seriously as a formidable economic competitor. But when it comes to the primacy of the dollar, the main risk stems not from Beijing but from Washington itself. The United States must maintain an economy that inspires global credibility and confidence. Failure to do so will, over time, put the U.S. dollar’s position in peril.

Washington should also be mindful that unilateral sanctions—made possible by the primacy of the dollar—are not free of cost. Weaponizing the dollar in this way can energize both U.S. allies and foes to develop alternative reserve currencies—and maybe even to join forces to do so. That is precisely why the European Union has been pushing to further promote [https://www.reuters.com/article/us-eu-euro/eu-pushes-for-broader-global-use-of-euro- to-challenge-dollar-idUSKBN1O41CU] the euro in international transactions.

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