When the Chinese Dragon Roars, the Foundations of the Global Economy Shake

Has the time come to overthrow America and to end the dollar's dominance?

This article was written by Evan Tzivanakis who is an FX business consultant and the director of a newly established Forex broker based in Asia. He has been in the financial industry since 2004 and in the FX industry for nearly 5 years.

The influence of the Chinese economy has grown significantly since it managed to overtake Japan and emerge as the second largest economic superpower on the planet. The international recognition so keenly desired by Beijing came a couple of weeks ago with the historic decision of the IMF to include the Chinese currency into the ‘currencies elite’.

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Great ambition and the size to match

The inclusion of the yuan into the ‘basket’ of currencies which enjoy the leading positions in global currency reserves is an important victory for Beijing and comes as a recognition of its efforts towards market liberalization. It confirms China’s ambitions for greater internationalization of its national currency and most importantly, it offers a glimpse of a future in which the Chinese currency will play a deeper role in the global financial system and worldwide trade. The inclusion opens the door to boosting its presence in the global financial system, threatening the dominance of the major reserve currencies, especially the dollar and the euro.

The Chinese economy may be second in size, however it remains one of the fastest growing, despite the fact that lately it has lost some of its momentum. It also has the largest foreign exchange reserves- in excess of three trillion dollars. Such large liquidity reserves enables an economy to withstand strong shocks.

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Despite the discussions in relation to the Chinese slowdown, which I believe is a normal and healthy slowdown, the Chinese yuan has entered the basket of currencies with a remarkable weight that exceeds 11%. This is enough to show how strong the Chinese economy is. I believe that this strength will continue to grow in the new year. Moreover, the Chinese market could reach high levels for buyers and investors. In the next five years over one trillion US dollars are expected to enter the Chinese market.

However… it’s all about geopolitics

The last G-20 took place in Antalya, Turkey and was dominated by the terrorist attacks in the streets of Paris. The G-20 in 2016 will be held in Hangzhou, China, which also happens to be the home of Jack Ma and the headquarters of Alibaba.

What if the 2016 Hangzhou meeting does offer a vision for the future, a new Silk Road, a plan arguably dominated by the vision of Xi? The Chinese president is at least willing to guarantee the G-20 as a multipolar, global mechanism to coordinate a common framework for development. In this plan, Washington and Beijing could actually work together in a world where chess, not battle, will become the game of the century.

Has the time come to overthrow America and to end the dollar’s dominance? Not immediately, but in the distant future, yes. Many reforms and more transparency are still needed- Beijing has a lot of work to do…

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