As China could exceed the United States as the world's largest economy in the next several years with the help of robust growth, speculation is mounting that the yuan may replace the U.S. dollar as the key international currency.
China has been trying to enhance the global status of its currency, also known as the renminbi, by promoting the use of the "digital yuan" in a group of economies belonging to its cross-border infrastructure "Belt and Road" initiative, pundits say.
But many of them are skeptical that the yuan will become the key currency even if China supersedes the United States as the world's biggest economy, given that the exchange rate of the yuan is not necessarily determined by the market unlike that of the dollar.
As long as the value of the yuan is managed by the Communist-led Chinese government, the currency would not serve as global means of payment amid questions about its convertibility and credibility, they say.
With China's tensions with the United States escalating, President Xi Jinping's leadership has been "very keen" to internationalize the yuan to "challenge the financial hegemony of the United States," a diplomatic source said.
The source, however, said China's ambition to elevate the status of the yuan to the key currency "would not be realized," as one of the world's major powers has little intention to allow the exchange rate of it to "be decided freely in the market."
Beijing wants to "dominate the global financial market by facilitating the cross-border use of the yuan," but for that, it "must give up its managed floating rate system by the central bank the Communist Party controls," he said. "It is a dilemma for China."
In the first three months of 2021, China's economy recorded its sharpest quarterly growth on record, expanding 18.3 percent from a year earlier, with both domestic and external demand rebounding from the coronavirus shock, government data showed Friday.
As the world's second-largest economy is certain to maintain growth momentum due in part to its 1.4 billion population, cutting-edge technology and ample natural resources, it is expected to become the world's biggest as early as by 2028, some analysts say.
On the back of its rising global economic clout, China has been apparently laying the groundwork to create an economic zone with its participants in the Belt and Road project, where the digital yuan would be used as the common currency of settlement.
Under the blueprint, China has sought to bolster infrastructure networks in Asia, the Middle East, Europe and Africa to achieve its goal of connecting countries along the ancient Silk Road trade routes more closely.
China's central bank, the People's Bank of China, has already started the trials of its digital currency in specific areas at home since mid-2020, paving the way for its becoming the first nation to establish a national electronic payment system.
Central banks in democratic countries such as the United States and Japan are believed to be vigilant of China's lead in issuing a digital currency, as it could threaten the long-standing position of the dollar as an international reserve currency.
"The digital yuan would enable emerging economies to swiftly and conveniently carry out payment and settlement operations at low cost," a central banker from a Southeast Asian nation said.
"The possibility cannot be ruled out that the yuan will rapidly build a position as key currency in a China-led economic zone," the banker said.
Since the 2008 global financial crisis triggered by the collapse of U.S. securities firm Lehman Brothers Holdings Inc., China, which had a vast amount of dollar-denominated foreign reserves, has stepped up efforts to internationalize the yuan.
The reserves, mainly comprising securities in foreign currencies centering on the dollar, are considered to be backup funds of a country in case of an emergency, including a plunge in its currency value in the wake of financial market turmoil.
If China had continued to own huge dollar assets, it would have suffered massive write-downs with the dollar facing downward pressure against other currencies, prompting the government to reduce its holdings of dollar-based securities.
While accelerating the adjustment of the composition of its foreign currency reserves, China has been aiming to develop a financial environment where it can trade goods and services with other nations with the yuan.
Transactions in yuan spreading across the globe, the International Monetary Fund in 2016 added the Chinese unit to its elite basket of reserve currencies, "Special Drawing Rights." The yuan is now the third-largest currency after the dollar and the euro.
Takahide Kiuchi, executive economist at the Nomura Research Institute in Tokyo, said the yuan could become as influential as the dollar worldwide, should China's attempt to internationalize its currency bear fruit.
The proportion of the dollar traded in the global foreign exchange market was 44 percent as of September 2019, but that of the U.S. unit could decrease to around 28 percent in the future, while that of the yuan could increase to about 18 percent, Kiuchi said
The calculation is based on the assumption that the yuan would be used in a China-led economic zone composed of Belt and Road participants, which could account for nearly 31 percent of world gross domestic product.
"If the internationalization of the yuan steadily moves forward, the competitive landscape of the dollar and the yuan would drastically change," Kiuchi said.
Nevertheless, he casts doubt on the view that the yuan may become the key international currency.
"Foreign companies would not like to receive proceeds from export sales to China in yuan," if they cannot exchange it for other currencies, such as the dollar and the euro, in a timely and free manner, Kiuchi said.
Chinese government regulations on foreign exchange transactions have "undermined the credibility of the yuan," which would prevent it from gaining the status of the key international currency, he added.