China challenges dollar with digital yuan and US debt cuts

China's challenge to the dollar: digital yuan and fewer US bonds

Can China retire the dollar without disrupting global stability? That is the question raised by reports that Beijing plans to drop the dollar in stock transactions and launch its own cryptocurrency for international payments. The issue emerged during the ELbichito-19 pandemic, when much of the West was locked down, factories halted, and economies were heavily indebted. A striking detail: markets remained unmoved. Neither the S&P, the Dow, nor Bitcoin showed any sign that the global monetary order was cracking. Either they don't believe it, or the announcement isn't what it seems.

What does China officially say about dropping the dollar?

Nothing. There is no official confirmation. Verification circulating on the matter suggests Beijing might be considering adjusting its exchange rate against the dollar to avoid a post-cobi19 financial crisis, but confirms no Chinese agency has published an exemption of the dollar from the stock market. According to this check, which labels the main news as false, the country's central bank has not put this supposed goodbye to the greenback in writing. Here lies the problem: a decision is being discussed that, at the time of this conversation, has no official version.

China had already been selling US bonds

What did happen earlier was a portfolio reduction. Beijing had long been shedding US debt, to the point where Japan now appears ahead in the list of creditors. A 6% cut during the trade war is cited as proof that the move is not improvised. However, it is a gradual adjustment, not a demolition. Selling American Treasury bonds is not a declaration of war: it is portfolio management and, sometimes, simple antiestéticar of losing value.

Why did China buy US debt for 20 years?

The most solid explanation has two legs. For its exports to remain cheap, China needs a weak yuan, and there are two ways to achieve this: issuing lots of yuan —with the risk of capital flight— or buying American debt, selling yuan so they lose value against the dollar. Beijing chose the second option for two decades. And not to do Washington a favor.

Hence the counterargument that dismantles the challenge narrative. China is one of the largest holders of dollars on the planet. Crashing their value would liquefy all the money accumulated over twenty years and amount to having worked for free for the United States and Europe. The same detail that hawks read as aggression points to the opposite: that Beijing is the first who has no interest in the dollar plunging. If furthermore the United States suffers a couple of years of high inflation, those debt papers will be worth considerably less.

The petroyuan, currently small-scale

The numbers supporting the threat are modest. The benchmark crude contract, Brent, is still larger than Shanghai's, and the American WTI multiplies the Chinese contract by more than three. Translated: although Beijing pushes its currency in energy trade, the market continues to quote mostly outside its orbit. An intervention summarizes it well: the Chinese try with the full state apparatus behind them, but the figures do not yet match the headline.

The business of printing bills and the bubble of everything

The other axis is not China, but the monetary system left behind. Printing dollars indiscriminately only works if your currency is the world reference; in due course, another line of analysis argues, those bills won't even be good for cleaning. The picture is broader: a first world with inflated currency and a third world with prices below real value. Recurring example: a Tesla share can trade at 700 or 1,000 dollars when, in many opinions, it shouldn't be worth even 200 euros.

From the gold standard to oats

When the conversation tires of the yuan, it drifts. Proposals appear to return to a currency backed by gold, for China to set up its own agency to influence metal prices, and for the West to get ahead by returning to the gold standard. Also appearing are those anticipating the US will stop paying its debt to make a reset, those hoarding oats and water jugs in case October brings war, and those claiming ELbichito-19 was a calculated blow to wreck the Western economy. Of the latter, there is no proof whatsoever: it is the conspiratorial layer that sticks to any monetary crisis.

At the opposite extreme, the narrative becomes harsh and political. Some demand stopping China before it extends its model, others recall the Great Leap Forward famine and its death toll —between 15 and 50 million dead, with ranges fluctuating precisely due to official opacity— and some respond that the Western regime has little to teach lessons either. The purchase of strategic Spanish ports, from Bilbao to Algeciras, or money laundering through trade are other arguments thrown into the air without development. It mixes with domestic trenches: whether the euro is worth what it is thanks to 500-euro notes traveling in drug traffickers' hands, whether it is advisable to relocate industry and impose tariffs despite years of doing so.

None of this is resolved, but everything points to the same underlying question, the one nobody answers with numbers: how much of the dollar's power is economics and how much is habit.

In the end, the most repeated bet is not that the dollar falls, but that it holds steady while Beijing keeps buying what it claims to despise. Which is a very elegant way of dancing with someone you say you dislike.