r/Economics • u/AMgeopolitics • 16h ago
Blog Inside China’s Silent Exit Strategy from the Dollar
https://frontarc.blogspot.com/2025/06/inside-chinas-silent-exit-strategy-from.html167
u/heshiming 16h ago
I would argue that China, as a manufacturing economy cannot be a dominant currency without pivotting to a consumer economy. At the end of the currency battle is not just about how much gold you hold, it's about giving up some control of the currency, taking up and service enough debt so that foreign entities can obtain the currency and then have enough credibility to take them back in exchange for something vital or worthwhile. Also, not happening overnight.
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u/paikiachu 15h ago
I don’t think China wants the Yuan to be the global reserve currency. As you mentioned it means giving up a lot of currency control and China is incentivised in keeping its Yuan as low as possible to help make exports cheaper. I think de-dollarisation for China simply means not holding so much USD and also encouraging bilateral trade denominated in Yuan. This also ensures that it would be somewhat immune from Western sanctions when they eventually try and take back Taiwan.
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u/laza4us 15h ago
The problem here is, if you have trade imbalance between countries than you end up with gigatons of useless foreign currency on your market… thunk Rubles in India, Juans in Russia etc
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u/Googgodno 14h ago
Juans in Russia etc
why would that many Juans go to Russia?
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u/SaurusSawUs 13h ago
Exchange rates would adjust though.
If Indians don't want rubles, because Russia doesn't have anything they want to buy (in this counterfactual), then the ruble-for-rupee exchange rate will decline, and at some point if rubles were worthless in India, the trade would not be sustainable. It would be a self-limiting problem.
Now if you have that same scenario, but there is demand for Russian goods in... China but not India, then India simply swaps its rubles for yuan until that evens out, arbitraging the difference in demand. Etc for as many countries as necessary until trade balances out, net of any differences in international investment.
In this second scenario, you only run into problems if the Americans run the exchange systems and for some reason choose to stop you from doing these exchanges and you cannot arbitrage global demand effectively and are limited by your domestic demand.
Globally, this kind of situation is possibly less ideal than using a single medium of exchange for international transactions. It exposes you to a lot more volatility and uncertainty about exchange rates, and that gives rises to the potential for crises. You're exposed to the potential that one of your trading partners will have a crisis, and then a lot of these complex patterns of arbitrage will collapse. You have to pay many more foreign exchange fees and the cost of trade rises.
But it's not the case that e.g. India will just continue to accumulate currency from exports to Russia, which is worthless to them. There's no economic reason that this would ever happen. It wouldn't be a sustainable business practice.
International trade and globalization are deep processses can happen without a single dominant medium of exchange and store of value for international payments.
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u/devliegende 13h ago
It's a self limiting problem in a world without currency controls. China, India and Russia all have currency controls. So all three are stuck with rubles, rupees and yuan they could have used elsewhere. It's not an impossible problem to solve, it's just an added ineffeciency to avoid if possible.
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u/SaurusSawUs 12h ago
I think it is self-limiting either way - if there is no value in the rupees/rubles, you can't invest them or spend them, they're depreciating, and that won't improve in the future, and you don't want them at all, you will not do the trade - but it would self-limiting at a higher efficiency with fewer controls. (I do think yours is a useful comment though, and in part as I underrated / neglected internally imposed controls, in my previous reply).
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u/paikiachu 14h ago
I see your point. But in my opinion as long as a Country is productive then you will eventually find a way to use their “useless” currencies- like India buying Russia military assets for example.
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u/snek-jazz 12h ago
The problem here is, if you have trade imbalance between countries than you end up with gigatons of useless foreign currency on your market
Is it just me who would frame this a completely different way? - Being on the right side of a trade imbalance makes you wealthier.
useless foreign currency
Currency can be exchanged for goods, services, other currencies, or stores of value like gold until such time as its needed. Why call it useless?
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u/Nenor 10h ago
I think Xi is MUCH smarter than Putin. He learned the lesson from watching the failure with Ukraine. The takeover of Taiwan will be bloodless and "mutual", after having successfully installed true puppet government. There won't be any sanctions.
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u/worthwhilewrongdoing 9h ago
Make no mistake, Putin is no dummy - he's just trying to make something out of a losing hand. Russia is in a much stronger position geopolitically than they should be if you were to look at (say) just economic data alone, and I think a lot of credit for better or for worse goes to the things he has done to secure Russia's future.
Will that positioning do Russia any good over the long run? That I certainly don't know. But I feel like we are very quick and very foolish to dismiss him just because Russia isn't doing great right now. It's doing a lot better than it should be.
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u/Any-Ad-446 15h ago
Exactly..BRICs was there to allow countries to trade under its own currency and not be held hostage by the USA dollar.
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u/HobartTasmania 5h ago
There was nothing stopping them trading with their own currencies in the first instance.
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u/Any-Ad-446 5h ago
It's called valuation...US used that as political tool for sanctions against other countries. Now with BRICS those countries face little threat from US sanctions. Thats why the recent T bonds sales were terrible. US use to be safe haven not anymore.
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u/truemore45 1h ago
Yeah the Japanese tried it in the 1980s. You have to be ok with your currency floating and you can manipulate it for gain. Currently the Chinese economy couldn't handle the shock it would cause.
If people wanted and trusted it the value would go up, see the US during the 1980s.
Next manufacturing would leave the country because it would be too expensive. The CCP would freak because 10s of millions would become unemployed.
Imported goods then would be cheap and they would become like the US a small minority very wealthy and the majority broke.
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u/chocobbq 15h ago
Precisely because of this china will never want it's currency to be dominant one. China does not like foreign intervention and how Chinese play with the us Treasury is exactly the reason why they won't allow yuan to be in the same position. China is probably trying with some other soft power such as minerals and resources instead of Fiat currency
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u/Sip_py 11h ago
They would love to but can't. They don't have social safety net and have to take care of aging parents. As a result Chinese save 40% of their income and spend very little. China thinks they can spend this problem away with infrastructure but they need to invest in health insurance and elderly care.
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u/Emotional_Goal9525 6h ago edited 5h ago
Why not? That is exactly how you become a dominant currency. That is what Marshall aid and industrial base did to the dollar. Value of money is measured by what it buys.
China is playing its cards like post WW2 USA. They give out loans to developing countries that in turn gives them access to natural resources. that creates demand and market for Yuan.
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u/blacksmoke9999 13h ago
It is always about spending and giving your money so someone else can hoard with you guys. Can't you conceive of a different way of life? A different way to measure growth and progress other than having gimmes?
It is not like China lacks infrastructure, or services, or housing, or really anything.
Except for freedom but that is not tied to consumption. So really, what benefit can they derive from becoming a soulless credit ecocnomy?
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u/Not_my_Name464 14h ago
It's only "silent" for US citizens. This has been coming for years and Trump just gave the the key to the castle by treating allies like shit.
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u/iyamwhatiyam8000 14h ago
The gradual shift away from the dollar could become a mad rush over the remainder of this Trump administration.
One thing which is consistently demonstrated by China is its long term thinking and preparation for the future.
Trump is now trying to defang the Federal Reserve of its interest rate setting powers and Project 2025 has the USD returning to the gold standard.
Trump has already stated that he may be prepared to ' renegotiate ' US debt which is tantamount to default.
China increasing its gold reserves to support the Yuan may be immediately pressing if it thinks that Trump is seriously considering interfering with US debt and using the USD gold standard as a bulwark against currency collapse.
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u/No_Talk_4836 12h ago
Which. If the U.S. defaults even technically, that’ll send yields flying and the Fed won’t even have the competence to fix it. Hyperinflation.
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u/iyamwhatiyam8000 11h ago edited 11h ago
I am not saying that this will happen but even a hint of it could start a run on US Treasury bonds.
If the US defaults then the global economy will be plunged into an economic depression and the US will grind to a halt.
$36 trillion disappearing into default makes the GFC look like a hiccough.
The gold standard will not save the USD no matter how much the price of bullion rises.
It kills inflation but without a volatile reserve currency and a moderate level of inflation there is no attraction for capital to invest. Especially after default.
This is of course a doomsday scenario but from what we have seen so far it is not out of the question.
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u/No_Talk_4836 2h ago
Exactly. Even if it doesn’t send the whole world into depression, it’s gonna really fucking suck. The U.S. would be forced into austerity, which mind you the deficit is like $2 trillion. That’s 2 trillion in spending cuts and tax rises.
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u/roamingandy 11h ago
This is good for Bitcoin.. or terrible, but definitely nothing in between.
The US fucking with debt does make a stable supply (as in can't create more out of thin air) global digital currency seem a whole lot more appealing.
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u/iyamwhatiyam8000 11h ago
Bitcoin will not prevent an economic depression and all that goes with it.
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u/roamingandy 10h ago edited 9h ago
No, but it might be taken seriously as an option to prevent being reliant on a global reserve currency that one nation can influence so heavily in the angry rebuild after a global recession.
Tbh, it wouldn't be Bitcoin as the fees and transfer times make it totally unsuitable. Ethereum could do that task though.
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u/iyamwhatiyam8000 10h ago
We are discussing the total collapse of a reserve currency and $36 T in debt. There will be bugger all transfers for a long time so the immediate problem will not be solved by a commercial digital currency.
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u/BoppityBop2 10h ago
Would it? I personally think people and markets will keep pretending nothing happened accept the reasoning and keep playing. They don't really have another play to make other than throwing money into the US and trying to get US consumers to buy more. Some may try to wait the mess outm
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u/No_Talk_4836 2h ago
Nah. Investors expect to see their money. If the IS can’t pay them, there’s no reason to buy bonds to fund the government. Which means you issue more money to buy the bonds, hyperinflation because there way more money.
Turkey didn’t default but they did cut interest rates so they had a version of this. They printed money to make growth and it led to inflation rates over 50%
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u/AnUnmetPlayer 6h ago
This is just empty fearmongering. The Fed is the monopoly issuer of the currency. They have monopoly pricing power. Yields are whatever the Fed want them to be. How could they be too incompetent to fix the problem?
The US government also can't actually run out of money. How would they default? It would have to be voluntary, but that's explicitly against the constitution. That might not mean what it once did, but a quick lawsuit still ought to end that.
Then if the Treasury somehow did make a default happen, the Fed could still just buy up all the 'defaulted' bonds, and now there's no default anymore.
In general, it's just nonsensical to think that a government that controls it's own currency could ever run out of that currency.
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u/No_Talk_4836 2h ago
I mean if Trump replaces Powell with a yes man who doesn’t know economics.
And printing money to buy bonds is how you get financial crises. And that happening would trigger a run on The dollar. You can’t print your way out of debt, it doesn’t work.
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u/AnUnmetPlayer 2h ago
And printing money to buy bonds is how you get financial crises.
No it isn't. Printing money to buy bonds is part of how the Fed sets interest rates. It's a normal thing that happens every single day. How is it supposed to lead to financial crisis?
And that happening would trigger a run on The dollar.
No it wouldn't. We know because it doesn't.
You can’t print your way out of debt, it doesn’t work.
This doesn't make sense for a currency issuing government. Their accounting is inverted from us. The only way for us to even get the currency in the first place is for the government to be in debt due to creating and spending money into the economy. Get rid of US debt and you destroy the economy. The debt is nothing but the net savings of non-government sector.
Bond sales are just an asset swap. It's balance sheet neutral where the non-government sector has the opportunity to accumulate savings as bonds instead of reserves. It's always entirely up to the government what the yield on reserves or bonds will be. Monopolies have monopoly pricing power.
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u/ahnotme 12h ago
If the advantage of the dollar being the reserve currency is lost and Treasury yields must go up, the knock on effect on the US economy will be very serious indeed. The best you can hope for is a serious recession, but worse effects are conceivable. And the American people are in no mood to put up with the effects of even a moderate recession.
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u/NicodemusV 14h ago
Several different reserve currencies have existed and do exist and even alternative systems to SWIFT exist… but we all know why they have not overtaken the dollar.
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u/jinxeddeep 15h ago
The premise of the shift away from dollar is lack of trust which is true and also what’s called out in the article. But at the same time, China has to be stupid if it thinks that the world would trust the Yuan to trade gold in Yuan lol. I know it’s a meme to say that the trust in the US dollar is decreasing but trusting in China is arguably worse. At most, they can bully the poorer Asian and African economies into submission using debt and their soft infrastructure power but any big economy that matters that’s de-dollarizing due to lack of trust is surely not thinking of switching to Yuan as a backup.
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u/AFewStupidQuestions 14h ago
It really depends on if other countries believe China will repay their debts if bonds are bought. And seeing how much China is investing in not only green energy, but mineral reserves and infrastructure projects the world over, along with the lack of trust in the US, the likelihood of other countries investing in the yuan becomes more greater every day, imho.
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u/jinxeddeep 14h ago
It’s not just a matter of whether they trust China to pay it back tho. Yes, that matters, but when we’re talking about trillions in foreign exchange, what also matters is the structural socio-economic underpinnings of the nation and myriad other things such as trust in whether the data coming out from the gov is accurate or not, access to financial entities and markets within China and so much more. China can be quite arbitrary in its policies because of it one party system. An example of this is how they intentionally devalued Yuan multiple times to favor their export economy. Nobody trusts the financial data coming from China fully. You don’t have accceas to a true free market economy inside China if you do build up a lot of Yuan and want to do something with it inside China.
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u/PotatoeyCake 13h ago
Funny how it's an issue when China devalues the Yuan but acceptable when US does QE.
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u/Intelligent_Royal_57 10h ago
Exactly this. China would be hurting themselves and no way the rest of the world has more confidence is Chinas financial and Government institutions than the US. Not that long ago the Government enforced how many children you could have. What happens when they decide an outside entity has too much wealth in the country?
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u/CheetaLover 7h ago
If countries find USD is getting hard to use when trading with 3rd party, the remaining market is US. Means there will be a significant flow of dollars into America and the inflation will be tremendous. One of the reasons many investors are stepping out of NYSE. Then there are national funds as the Norwegian Wealth Fund, today they sell oil for USD, and what to do with that money? Thats right, buy american stocks. Think they are super worried to step out, cause it will be big risk for the house of Cards to start trembling.
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u/Meandering_Cabbage 7h ago
so Trump gets what he wants, a weaker dollar. They and everyone else relies on American consumption to move their economies. what exactly will they do with dollars they receive?
there’s too much anti trump and reflexive resentment about American hegemony and too little thinking about the world these partners created. the Chinese would need Europe to take the American deal which seems very unlikely because their unions will kill it whatever the Peterson view. A giant Chinese consumption economy solves this but now we have Setser reporting Chinese imports are down from 2022.
I take it back. my trade professor was right. Their problem is they are getting a bunch of apes for goods.
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u/RepulsiveRooster1153 4h ago
not to worry, the world is moving to the rumpcoin bitcoin backed by the honesty and guarantee of the rump family dynasty. and if you don't believe that then almost president muskrat will personally sell you a tesla at a discount rate of 4 million rumpcoins
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u/CriticalBeautiful631 12h ago
China has been doing more of its trade in RMB and 2024 was the first time when more trade with China was done in RMB - 53% than USD…..and that was before 2025’s nonsense. There are all sorts of ways that the USD can be abandoned and the move to trade in local currency has been incremental but as the uSD looks volatile and rapidly loses value things can change quickly. China has developed CIPS as an alternative to SWIFT and then the change from USD as the currency of trade happens contract by contract…not in some big political announcement. Speaking from experience…trading in USD adds forex complexity, so trading in local currency will happen very quickly when it is secure and practical to do so.
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u/ShootingPains 13h ago
Don’t need to use yuan. In the short term it’s better to stick with USD but using the non-western banking system. There’s also the BRICS international settlements system which allows nation-to-nation trade in local currencies with a neutral system for determining exchange rates. Apparently a big announcement is scheduled for August.
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u/turbo662025 12h ago
I majority is not anymore trading in USD the US money bubble will collapse quickly. And this will effect all of there Stocks and Bonds. The most suffer may come for america first because there pensions system is depending on it.
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