The risks of dedollarization and the possibility that the Chinese yuan would replace the U.S. dollar as the world's reserve currency have both been examined by JPMorgan. The renminbi, according to the international investment bank, may take on "some of the current functions of the dollar among non-aligned countries and China's trading partners."
JPMorgan on the Chinese Yuan and de-dollarization
Thursday saw the release of a paper from JPMorgan's Global Research titled "De-dollarization: Is the US dollar losing its dominance?"
Strategic Research is covered by Alexander Wise at JPMorgan.
Due to geopolitical and geostrategic changes, the risk of de-dollarization, which has been a regularly recurring subject throughout post-war history, has come back into focus.
Two scenarios were presented by JPMorgan as having the potential to weaken the dollar's position as the world's reserve currency. The global investment bank listed the first as "unfavorable events that undermine the perceived safety and stability of the dollar—and the U.S.'s overall standing as the world's foremost economic, political, and military power." The second aspect is encouraging events that take place outside of the United States and increase the legitimacy of alternative currencies, such as political and economic reforms in China.
The report also covers alternatives to the dollar as a currency. "A candidate reserve currency must be perceived as safe and stable, and it must provide a source of liquidity that is sufficient to meet growing global demand," Wise said.
In response to the question of whether the Chinese yuan (renminbi) could replace the USD, the analyst provided the following explanation: "With China's growing centrality in global commerce, one might naturally expect the renminbi to assume a greater role in the global economy over time, but this transition would likely occur over the course of decades." Added him:
Relaxing capital controls, opening markets, enacting measures to increase market liquidity, promoting Chinese government bonds as an alternative safe asset, and lowering appropriation and regulatory risk could all help establish China and the renminbi as a respectable alternative to the U.S. and the dollar.
Additionally, the paper analyzes the dedollarization of the oil markets, noting that "more oil sales are now being transacted in non-dollar currencies such as the renminbi." According to Natasha Kaneva, head of global commodities strategy at JPMorgan, "the U.S. dollar, one of the key drivers of global oil prices, appears to be losing its once powerful influence."
According to Jahangir Aziz, head of JPMorgan's Emerging Market Economics Research: "Overall, we find that the dollar's importance has decreased significantly from 2014 to 2022."
In response to the question of whether de-dollarization is near, JPMorgan stated: "While marginal de-dollarization is expected, rapid de-dollarization is not on the cards." The international investment bank went on:
Partial de-dollarization, in which non-aligned nations and China's trading partners use the renminbi to replace some of the dollar's current functions, is increasingly likely, especially in the context of geopolitical rivalry.
"This could over time give rise to regionalism, creating distinct economic and financial spheres of influence in which different currencies and markets assume central roles," JPMorgan said in its analysis.
Do you concur with the experts at JPMorgan regarding dedollarization? Do you believe the Chinese yuan has a chance of unseating the US dollar as the global reserve currency? Comment below with your thoughts and let us know.