Editor's Note

EAI is publishing a special report series as part of its ongoing research into US-China competition and the role of middle powers like South Korea from a long-term perspective. Competition between the United States and China over the international monetary order is expected to intensify further. However, Professor Lee Yong-wook suggests that the US-China strategic competition could transition into a cooperative system, forecasting possibilities such as the early failure of the Chinese Yuan's challenge, the emergence of a stable multipolar monetary system among the US, China, and Europe, and the mitigation of US-China competition and stabilization of the monetary order through the G20.

* This report is a revised and supplemented version of 'US-China International Reserve Currency Strategic Competition and South Korea's Response,' published as an EAI Special Report in August 2020.

I. Internationalization of the Chinese Yuan and the Full-Scale Monetary Competition between the US and China

1. US-China Monetary Competition and Global Hegemony

The monetary order centered around the US dollar as the international reserve currency is a key mechanism for the United States to maintain and manage its global hegemony. As is well known, currency wars are not merely economic issues, and if the Yuan becomes sufficiently internationalized to challenge the dollar, the US-China relationship will fundamentally change. Let us examine representative aspects that illustrate the changes in the US-China relationship mediated by shifts in the monetary order.

First, US leadership in forums such as the G7 and G20 could be significantly undermined. The reason the US can enforce global macroeconomic adjustments according to its will, despite its massive current account and fiscal deficits, is due to its financial power based on monetary hegemony. The internationalization of the Yuan signifies a potential weakening of this American unilateralism. Second, a substantial reduction in US macroeconomic autonomy is also anticipated. This means the US will no longer be able to arbitrarily issue dollars without worrying about inflation. The macroeconomic autonomy the US has enjoyed was possible because the dollar is the reserve currency. In other words, global demand for dollars has largely offset the inflationary pressures from increased dollar liquidity in the US. Finally, if the dollar loses its status as the reserve currency, US borrowing costs will increase, thereby constraining military spending. This implies that the US's formidable military power is dependent on the dollar system (Lee Yong-wook 2017, 165-166).

2. China's Strategy for Yuan Internationalization

China has been ambitiously pursuing the internationalization of the Yuan in earnest since the US-originated global financial crisis of 2008. Following then-People's Bank of China Governor Zhou Xiaochuan's critique of the inherent instability of the dollar-based international monetary system, Jiang Yong of China Institutes of Contemporary International Relations, a leading Chinese think tank, emphasized the urgency of Yuan internationalization by stating, "Ending US dominance in the international monetary system is as important as China becoming a nuclear power" (Lee Yong-wook 2017, 173-174). Similarly, Professor Wang Yong of Peking University argued that just as the US enhances its interests through the dollar, China needs to reform the international financial system to protect its national interests and increase the Yuan's role in response to the dollar.

In this context, President Xi Jinping officially declared the internationalization of the Yuan as a national policy at the National People's Congress in 2009. The background to China's pursuit of Yuan internationalization is the perception that the dollar system is the core order perpetuating the asymmetric power relationship between the US and China. Furthermore, Barry Eichengreen's assertion that "countries with non-reserve currencies are inherently vulnerable to currency crises" gained traction in China.

China is implementing its Yuan internationalization strategy in phases. The strategy is characterized by a sequential approach: first, establishing the Yuan as an international transaction/investment currency, and then positioning it as a major reserve currency. Through this, China plans for the Yuan to become the reserve currency of East Asia by 2027 and a major international reserve currency comparable to the US dollar by 2038 (Kim Jeong-sik 2020).

3. Benefits of Yuan Internationalization

The internationalization or reserve currency status of the Yuan will not solely benefit China. The benefits and costs associated with the Yuan's internationalization for China, which may influence the extent to which China pushes for it in the future, are as follows. First, examining the areas where benefits are expected: completing the image of a superpower through reserve currency status, stabilizing foreign exchange reserves due to reduced exchange rate risk, seigniorage income (estimated at $50 billion annually for the US), financing government expenditure at low interest rates without exchange rate burdens, and enhancing the competitiveness of Chinese investment and financial firms through increased investment in Yuan-denominated assets.

The costs China must bear are also significant. These include the anticipated exchange rate instability as the Yuan's exchange rate will be determined in an open market. Additionally, China will have to accept trade deficits to supply liquidity to the global economy. The weakening of the Communist Party's economic dominance due to the opening of capital markets is also a considerable cost.[1]

4. Full-Scale US Response

Until recently, the US had not taken China's Yuan internationalization seriously and maintained a passive stance. However, it has recently shifted its position and declared its intention to respond to the Yuan's internationalization. For instance, the Federal Reserve Board (FRB) has indicated that it may consider issuing a digital dollar in response to the digital Yuan. This marks a new phase in the US-China monetary competition.

Among US monetary policy experts, discussions about the crisis facing the dollar system have also begun. Henry Paulson, former Secretary of the Treasury under the Bush administration, wrote in Foreign Affairs on May 19, 2020, about the future of the dollar in the face of the Chinese Yuan's challenge. Furthermore, prominent international finance and monetary experts such as Benjamin Cohen (2017, 2019), Harold James (2020), and Eswar Prasad (2017, 2020) have started discussing the possibility of the end of dollar hegemony.

5. Inflection Point in US-China Monetary Competition

However, as will be discussed later, the internationalization of the Yuan since 2009 has not met initial expectations, and the Yuan's current standing in the global economy is significantly weaker compared to the dollar. Most experts do not anticipate the Yuan rivaling the dollar in the short term. Therefore, the warnings from the US regarding the dollar's future can be interpreted in one or both of the following ways.

First, it may be based on the assessment that the political, economic, and social conditions supporting US dollar hegemony are rapidly deteriorating. Second, it could be that China's Yuan internationalization is entering a phase of achieving initial results after a period of investment.

Considering that the combined share of the Euro, Pound, and Yen in the global economy averages around 30-35%, the strategic competition between the US and China over Yuan internationalization is predicted to become acute when the Yuan's share begins to exceed 10-15%. At that point, the dollar's share will fall below 50%, making it difficult to maintain its current hegemonic monetary status. Since the start of the US-China trade dispute in 2019, the conflict between the US and China has escalated daily, extending to IT industries including Huawei, WeChat, TikTok, and Tencent. Amidst this trend, the clash between the dollar and the Yuan has emerged as a key topic, coinciding with the recent launch of the digital Yuan.

II. Status of Yuan Internationalization

1. Comprehensive Assessment of Yuan Internationalization (2009-2020)

In conclusion, the internationalization of the Yuan over the past decade cannot be considered a great success. While the Yuan secured its status as a reserve currency by being included in the IMF's SDR in May 2016, its internationalization has been largely stagnant since 2015. As of 2019, the Yuan's standing in the global economy is as follows: its share as a settlement currency is 1.8%, its share in foreign exchange trading volume is 4.3%, and its share in foreign exchange reserves is 1.9%. In terms of overall currency ranking, it is approximately 5th-6th.

2. Specific Assessment of Yuan Internationalization (2009-2020)

Let us examine the trend of Yuan internationalization more specifically over time (see appendix below). We will review it based on the three functions of currency: intervention and settlement in foreign exchange markets (intervention currency/transaction currency in the appendix), reserve currency (reserve currency/asset currency in the appendix), and reference currency for exchange rates (reference currency/quoted currency in the appendix).

Intervention and settlement in foreign exchange markets can be assessed by the proportion of Yuan trade settlement and the number of offshore Yuan clearing banks (Appendix: A). The Yuan's share in global trade settlement peaked at 0.6% in 2012 and 2.2% in 2015, and stood at 1.9% as of 2019 (Appendix: D). However, the proportion of China's trade settled in Yuan has been increasing, rising from 8% in 2012 to 30% in 2015, and exceeding 38% in 2020. The number of offshore Yuan clearing banks, first established in Singapore in 2013, increased to about 10 in 2015 and reached 24 as of 2019. Yuan clearing banks have been established in major financial hubs such as London, Frankfurt, Paris, Luxembourg, Doha, Toronto, Sydney, Seoul, Tokyo, and Bangkok.

The reserve currency function can be assessed by the proportion of Yuan in foreign exchange reserves and the increase/decrease in the number and volume of Yuan currency swap agreements (Appendix: B). As mentioned earlier, the proportion of Yuan in foreign exchange reserves was only 1.9% as of 2019. Starting with a currency swap agreement with South Korea for 18 billion Yuan in 2008, the number of such agreements rapidly increased to 33 countries with a total volume of 3.3142 trillion Yuan by 2016. This volume and number of countries have not significantly changed since then.

The role of the Yuan as a reference currency for exchange rates can be observed through the issuance of offshore Yuan-denominated bonds (Appendix: C). China has utilized Hong Kong to expand the offshore Yuan bond market. The issuance of Yuan-denominated bonds, starting at 12 billion Yuan in 2008, doubled annually, reaching 750 billion Yuan by 2014. After reaching 1.3 trillion Yuan in 2016, it slightly decreased to 1.2 trillion Yuan as of 2018, with the total transaction volume reaching 26 trillion Yuan as of 2019.

Overall, Yuan internationalization appears to have entered a period of relative stagnation after 2015. However, following COVID-19 in 2020, the use of the Yuan has begun to increase again. In 2021, the Yuan's share in foreign exchange transactions increased to 2.4%, the highest level since 2016. Morgan Stanley recently predicted that the Yuan's share in global foreign exchange reserves could increase from the current 2% to 10% by 2030. The strengthening of the Yuan is linked to the surge in dollar supply following COVID-19 and the uncertainty surrounding the US economy. This explains the projection that US-China monetary competition may intensify sooner than expected.

III. Five Signs of Cracks in the Dollar System

Following COVID-19, warnings about the future of the dollar have been sounded. Numerous signs indicate that the foundations supporting the dollar system are shaking. Meanwhile, China is actively expanding the institutional framework for Yuan internationalization. Let us briefly examine five signs that illustrate the instability of the dollar system and the opportunities for the Yuan.

First, the US Federal Reserve injected a massive liquidity of $4 trillion in response to COVID-19. This oversupply has led to a decline in the dollar's value, negatively impacting its credibility, a key condition for a reserve currency, and the prevailing expectation is that the dollar's value will continue to fall. The dollar index, which was 98.5p in early 2020 (January-June), recently fell to 89p (as of May 25, 2021). The fact that the dollar swap lines established by the US Federal Reserve with 14 central banks in March of this year remain largely unused suggests a trend of dollar liquidity overhang.

Second, the petrodollar system, a cornerstone of the dollar system, is showing cracks, and the Yuan is gaining ground as a transaction currency. In July 2020, BP, a global oil company, paid for a total of 4 million barrels of Iraqi light crude oil delivered to China (3 million barrels in the first shipment and 1 million in the second) in Yuan, not dollars. Similarly, Mercuria, a Swiss energy trader, conducted a Yuan futures contract for 2 million barrels of UAE crude oil (Kim Yeon-gyu 2020). China launched the Shanghai International Energy Exchange (INE), a crude oil futures market, in March 2018, becoming the world's third-largest oil importer. The INE is expected to leverage China's position as a major oil importer. If it can compete with existing exchanges like the Intercontinental Exchange in the UK and the New York Mercantile Exchange in the US, the petrodollar system could be significantly impacted.

Third, the Cross-Border Interbank Payment System (CIPS), an alternative international payment system built by China, is becoming more active. China established CIPS in October 2015 to counter the US-led SWIFT (Society for Worldwide Interbank Financial Telecommunication).[2]CIPS began with a modest 19 participating banks from 6 countries in 2015, but it has seen remarkable growth, with 865 banks from 89 participating countries as of 2019 (Nikkei May 20, 2019). One analysis suggests that the rapid recent growth of CIPS is largely due to the Trump administration's hardline foreign policy (frequent economic sanctions),[3]as financial institutions worldwide are unable to maintain transactional reliability with the US dollar (James 2020; Subbarao 2020).

Fourth, China has recently significantly liberalized its financial markets, enhancing the liquidity and external openness of its domestic capital markets, which have been cited as obstacles to Yuan internationalization. In March 2019, China passed the "Foreign Investment Law" at the National People's Congress, which officially took effect on January 1, 2020. While domestic financial business is being revitalized, there is a view that to explosively increase currency internationalization, credit-debt creation in international capital markets must be activated, and this can be seen as China's response to that need.

The "Foreign Investment Law" includes key provisions such as national treatment for foreign enterprises, expansion of permitted sectors for foreign investment, protection of intellectual property rights and prohibition of forced technology transfer for foreign-invested enterprises, and fulfillment of commitments by local governments (Kim Ye-kyung 2019; Prasad 2020, 364-368). China has comprehensively enhanced the protection of foreign investment profits and the convenience of fundraising across the financial sector, including securities, banking, and insurance. For example, it encourages foreign financial institutions to participate in the establishment of financial asset management companies and investment in asset management subsidiaries of commercial banks, removed equity restrictions, and allowed foreign capital to independently establish or participate in pension fund management companies and foreign exchange brokerage companies. Furthermore, it implemented financial liberalization measures by shortening the timeline for converting foreign capital control ratios for securities firms, fund management companies, and futures companies from 2021 to 2020, allowing controlling stakes (51%) in these companies, and completely removing equity restrictions after three years (Ahn Yu-hwa 2020).

Finally, the launch of the digital Yuan by the People's Bank of China in 2019, mentioned earlier, and its ripple effects. The digital Yuan can serve as a new means for Yuan internationalization. Leveraging the global networks of Chinese tech giants like Alibaba and Tencent, digital Yuan transactions can be rapidly expanded globally. The digital Yuan can also be widely used in Chinese trade settlements and the Belt and Road Initiative. Yi Gang, Governor of the People's Bank of China, recently argued that the digital Yuan "can be an alternative to the US-led payment system and a mechanism to resolve any financial sanctions and threats that may be imposed on China and Chinese companies" (quoted in Loh 2020, p. 3).

IV. US-China International Reserve Currency Competition Strategy and Scale of Damage

Given that the US has announced its intention to counter the internationalization of the Yuan, the US-China strategic competition for international reserve currency status can be considered to have entered a full-fledged phase. If China proceeds with its plan to establish the Yuan as the reserve currency of East Asia by 2027 and surpass the dollar system by 2038, the next decade will determine the future direction of international reserve currencies. As mentioned earlier, the strategic competition between the US and China over Yuan internationalization is expected to intensify when the Yuan's share in the global economy begins to exceed 10-15%, leading to a transition to a multi-polar currency system as the dollar's share falls below 50%.

In this context, the US and China's international reserve currency competition strategies and the scale of damage are analyzed below. From the perspective of the US's grand strategy to defend the dollar, we explore what policy tools the US can use to weaken Yuan internationalization, what initial containment measures might be available, what mid- to long-term strategies exist, and whether the US will bind its allies and friendly nations into a dollar alliance, similar to the Economic Prosperity Network (EPN). We also consider strategies China can employ to counter US pressure and weaken the dollar system, independent of its active Yuan internationalization policies.

In summary, assuming that the US-China monetary competition will continue for the next decade or so, we present the currency statecraft that both countries can employ to pressure each other during the process of Yuan internationalization and dollar system defense. We also provide a rough basis for calculating the scale of damage that these strategies will inflict on both sides, thereby anticipating the future course of US-China conflict. For a summary of currency strategies and damage analysis indicators, please refer to Table 1 below.

2. Policy Tools and Scale of Damage in US-China Competition Strategies

Monetary strategies are expected to be employed in ways that influence economic power, currency credibility, domestic financial market liquidity and institutional foundations, currency networks, and military power, which are determinants of international reserve currency status. Among these, economic power and currency credibility are the fundamental bases of an international reserve currency and are policy cards that the US and China will utilize in the early stages of conflict. Strategies to weaken domestic financial market liquidity and institutional foundations, currency networks, and military power correspond to mid- to long-term policies. This implies that these are policy choices that the US and China will seriously consider when the Yuan's internationalization share reaches 10-15%.

Of course, in reality, the US-China strategic game can unfold simultaneously across all these dimensions. Furthermore, these variables are interconnected and can conflict with each other. However, for clarity of analysis, we will categorize and review each strategy and its scale of damage by variable below. Due to the deeply intertwined economic relationship between the US and China, both countries must be prepared for significant damage and sacrifice regardless of the strategy they choose (Huang and Smith 2020).

<Table 1> US-China Currency Competition Strategies and Damage Analysis Indicators

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First, a strategy to weaken economic power (economic scale and trade volume). As in the case of economic pressure on China in 2019, the U.S. may attempt to impose tariffs on Chinese exports, restrict U.S. corporate investment and technology transfer to China, and restructure global production networks. China may also retaliate by imposing tariffs on U.S. products, restricting Chinese corporate investment in the U.S., and implementing export controls on key components.

Mutual damage analysis can be confirmed through employment indicators, tax revenue, consumer damage costs, increased production costs due to tariffs, and reduced exports and imports. The scale of mutual damage from the U.S.-China trade dispute, which lasted from March 2018 to January 2020, can be examined as an example. The U.S. imposed tariffs of 10-25% on imports from China, amounting to approximately $750 billion. China also applied the same 10-25% tariffs on imports from the U.S. Since China's exports to the U.S. are much larger than its imports, the total amount of tariffs was limited to $170 billion. Instead, China took various measures targeting the agricultural regions, which are a key political base for President Trump, by restricting imports of agricultural products such as soybeans, sorghum, and corn (Lee, Wang-hwi 2020, 88-89).

The scale of damage to the U.S. is as follows. According to Moody's analysis, 30,000 U.S. workers lost their jobs, households experienced a monthly income decrease of $831, and factory utilization rates recorded historic lows. U.S. agricultural and fishery exports faced an average income reduction of 64% due to China's import restrictions. Furthermore, the bankruptcy rate in rural areas increased by 24%. Tax revenue also decreased due to reduced employment and income. The trade war with China also negatively impacted U.S. investment. U.S. investment growth rate declined by 0.3%, stock prices fell by 6%, and market capitalization suffered a loss of $1.7 trillion.

The scale of damage to China is as follows. According to JP Morgan's analysis, economic growth rate recorded its lowest level since 1992, and the Producer Price Index (PPI) fell by 0.3%, turning negative for the first time in three years. The Purchasing Managers' Index (PMI) recorded 49.7%, indicating that the economy had entered a contractionary phase (generally, below 50% signifies economic contraction). Investment in fixed assets for production also significantly decreased due to increased investment uncertainty caused by sanctions on Huawei, etc.

Second, a strategy to weaken monetary credibility (monetary stability). The U.S. can induce a decline in the value of the yuan through a strong dollar policy, leading to the withdrawal of yuan-denominated investments from the international capital market. This can directly impact the internationalization of the yuan. A strong dollar policy incurs the cost of an expanding U.S. current account deficit in the short term. China can check U.S. monetary policy by inducing instability in the value of the dollar through large-scale sales of its $1.5 trillion in U.S. Treasury bonds, or through repeated large-scale purchases and sales. A decline in the dollar's value incurs costs associated with losses on China's dollar investments. The relative degree of damage is expected to be the key factor. Damage analysis can be measured through exchange rate indicators and the instability of domestic investment, production, and consumption due to exchange rate volatility. The volume of transactions and investments in dollar/yuan denominated assets will also help in calculating the extent of the damage.

For instance, if China sells all of its $1.5 trillion in Treasury bonds, which corresponds to 7% of U.S. GDP, Brad Setser, a U.S. Trade Representative official, estimated that the interest rate on long-term U.S. Treasury bonds would rise by 30 basis points (Setser 2018). This figure could cause significant shock to the U.S. capital market. China has experience in rapidly increasing the volatility of the U.S. capital market by selling $200 billion in U.S. Treasury bonds over three months between 2015 and 2016. Meanwhile, China faced a situation on the verge of a financial crisis in 2015 due to a sharp decline in stock prices and large-scale capital outflows.

Third, a strategy to disrupt the liquidity and institutional foundation of domestic financial markets (degree of capital market development and openness of capital transactions). The U.S. can neutralize the development of the Chinese financial market by restricting or withdrawing investment by U.S. financial firms in the Chinese financial market. China can attract major financial firms from the U.S., Europe, Japan, and South Korea by offering various incentives, and strengthen the competitiveness of the Shanghai International Financial Center to check the financial dominance of the New York financial market (Green and Green 2020). The extent of damage can be estimated through the relative transaction volume and changes in profits and losses in financial markets such as New York, London (reflecting the special relationship between the U.S. and the UK), Hong Kong, and Shanghai.

As of 2021, the market capitalization by stock exchange is as follows. The New York Stock Exchange is $25.62 trillion, and NASDAQ is $19.51 trillion. Hong Kong Exchange is $6.76 trillion, Shanghai Stock Exchange is $6.56 trillion, and Shenzhen Stock Exchange is $4.83 trillion. In terms of the Global Financial Centres Index, New York ranks first, London second, Shanghai third, Tokyo fourth, and Hong Kong fifth. This demonstrates the significant advancement of Chinese finance.

If domestic financial market disruption is maximized, it could lead to a financial crisis. In the case of the U.S., the scale of damage can be calculated using economic loss indicators that analyze the aftermath of the 2008 financial crisis. According to the PEW Briefing Paper #18 (“Cost of the Financial Crisis”) published in 2009, household losses due to decreased economic growth were $5,800, and public support from the federal government incurred a cost of $2,050 per household. Losses of $100,000 per household resulted from stock price declines and housing price drops. The total volume of non-performing loans in U.S. banks reached $1 trillion. The discrepancy between the potential and actual growth rate of U.S. GDP amounted to $1.2 trillion, resulting in losses of $105,000 per household.

In China's case, since it has not yet experienced a financial crisis, the scale of damage can be predicted using the "General Theory of Financial Crisis Loss Scale" proposed by Reinhart and Rogoff (2009). According to Reinhart and Rogoff, when a financial crisis occurs, production decreases by 9%, and unemployment rises by 7%. Stock prices fall by 50%, and housing prices drop by 35%. Finally, public debt increases by 86%.

Fourth, a strategy to collapse the monetary network (scale of the monetary transaction network). The U.S. can request its allies to refrain from yuan transactions. It can also restrict yuan transactions by U.S. firms. Conversely, China can seek to weaken the dollar network through investment and economic support to U.S. allies (Broz, Zhang, and Wang 2020). Restricting Chinese corporate investment in the U.S. is also an option available to China.

The extent of damage can be analyzed by the increase and decrease in the asset share of the U.S. and China in financial markets, foreign exchange markets, foreign direct investment, and foreign indirect investment, as asset fluctuations in the international capital market are closely related to the scale of the monetary network. Specific monetary network measurement variables include the share of over-the-counter derivatives transactions, the share of foreign exchange transactions, the share of foreign exchange reserves, the share of listed company market capitalization, the share of foreign direct investment, the share of foreign indirect investment, and the share of total financial assets (Fischtner 2016). Table 2 below shows the share of U.S. and Chinese financial assets by monetary network segment as of 2019. The increase and decrease in the asset share of the U.S. and China depend on the extent to which both countries can effectively implement their strategies to collapse the other's monetary network. Based on the 2008 global financial crisis, the total scale of U.S.-China financial assets is expected to fluctuate by up to 10% annually.

<Table 2> Share of U.S.-China Financial Assets by Monetary Network Segment (2019) (%)

Source: Compiled from data from the Bank for International Settlements (BIS) and the IMF by the author

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* Other Anglosphere includes the UK, Canada, Australia, and New Zealand.

Lastly, there is the strategy of containing military and security capabilities.The United States can devise ways to control China's core interests such as the South China Sea, East China Sea, and Taiwan (Park Young-jun 2017). China can pursue the dismantling of the US military alliance network through military buildup and economic diplomacy. The scale of damage can be estimated based on the opportunity cost analysis from increased defense spending and the economic costs incurred by escalating tensions, such as military sanctions. For a detailed analysis, refer to the work of Professor Chun Jae-sung, who is in charge of US-China military strategy in this project.

The confrontation between the military capabilities of the United States and China is directly linked to the scale of defense budgets determined by each country's fiscal capacity. Due to accumulated massive fiscal deficits, the US defense budget has always been a subject of debate between the White House and Congress. For instance, under the "Budget Control Act" passed in August 2011, the US agreed to reduce its defense spending by $476 billion over the next 10 years, which amounted to 10% of the total defense budget (Chun Jae-sung 2017, 20). Since the Trump administration took office, the defense budget has increased to over $700 billion, indicating a corresponding increase in the US government's fiscal burden. This clearly demonstrates the benefits of the dollar-centric currency order, which enables low borrowing costs. Since 2010, China has been rapidly increasing its defense spending, particularly aiming to become a maritime power. This is a strategic move considering the South China Sea, East China Sea, and Taiwan, where there is significant potential for conflict with the US. China has been increasing its defense budget by more than 10% annually since 2010, except for 2016 (Lee Dong-ryul 2017, 39-40). Along with China's fiscal capacity, the success of the internationalization of the RMB suggests that China can establish conditions to procure defense funds at low cost, similar to the United States. This is a case of mutual conditioning between the currency order and military power.

V. US-China Currency Strategy Competition 2030, 2050

The competition between the United States and China over the international monetary order is expected to continue for more than 20 years. As Eswar Prasad (2020, 368-369) argues, the status of the RMB will rise, and it is likely to become convertible in the near future. If this trend continues, the full-scale currency competition between the US and China will begin after 2025. In particular, the US-China currency competition is expected to intensify around 2030, when the RMB accounts for more than 10% of total foreign exchange trading volume and the dollar's share falls below 50%.

According to this, the decade from 2030 to 2040 could be a period of intense confrontation between the US and China for currency hegemony. During this time, the US and China will begin to exert direct and indirect pressure on numerous countries to join their respective currency networks. This could lead not only South Korea but also Japan, Southeast Asian, South American, and African countries to face the pressure of choice stemming from the US-China currency competition. Following these confrontations and conflicts, the international monetary order is expected to enter a period of stability around 2050. In other words, the results of the US-China confrontation between 2030-2040 will become clear by 2050. Scenarios such as the victory of the dollar system or a dual currency system of the dollar and the RMB can be anticipated. Considering the high path dependency of currency networks, a sole RMB order is generally unlikely.

Of course, the possibility of a paradigm shift towards a cooperative system in the strategic competition between the US and China over international reserve currencies cannot be ruled out. There are three possible scenarios for this. First, China's challenge with the RMB ends prematurely with failure. This premature end could result from internal issues within China or be attributed to the resilience of the US dollar system. In this case, similar to the relationship between the dollar and the euro, the RMB would function as a regional currency for East Asia, based on the dollar's global role. Consequently, the international monetary order could evolve into a duopolistic system where the euro and the RMB coexist and compete under the dollar system.

The second scenario is a stable multipolar currency system resulting from deepened financial interdependence between the US, China, and Europe. With the opening of China's financial markets, US and European financial institutions would actively enter China, leading to investment returns and establishing Shanghai as an international financial center comparable to New York and London. Furthermore, China's massive RMB investments would supply additional growth momentum and financial stability to the economies of the US, Europe, and the rest of the world. The revitalization of RMB international financial hubs is also included here.

The third scenario involves the mitigation of US-China competition and stabilization of the monetary order through the G20. G20 member states such as South Korea, Japan, and Eurozone countries can establish international norms and rules to prevent the weaponization of monetary policy through discussions within the G20. The G20 can also exercise cognitive discourse leadership. There is not yet a consensus on the optimal currency system (monetary vs. pluralistic system). South Korea and other G20 member states (excluding the US and China as primary parties) can plan cognitive leadership and collaborate to create a global discourse on this matter and implement it to stably manage US-China currency competition. The launch of a Synthetic Hegemonic Currency, proposed by Mark Carney, Governor of the Bank of England, at the 2019 Jackson Hole meeting, serves as one example. Utilizing G20's informal channels, policymakers, private experts, and academics can engage in broad discussions on various currency system scenarios. Within the G20 framework, South Korea can research and contemplate which currency system, including the dollar system and the RMB-based pluralistic reserve currency system, would be most beneficial for the stability and prosperity of South Korea and the world order, thereby proposing a direction for the new 21st-century international monetary order.■

Appendix: RMB Internationalization Indicators

A. Intervention Currency/Transaction Currency

1. RMB Trade Volume/ Ratio

• Stagnant
• May 2018: 1.65%, May 2020: 1.90%.
• RMB trade settlement ratio: 0% -> 8% (2012) -> 30% (2015) -> 38% (2020)[4]

2. RMB Clearing Banks

• Stagnant
• 24 as of 2019
• As of May 2020, 25% of transactions occurred outside of China and Hong Kong

B. Reserve Currency/ Asset Currency

• 5th globally in currency swap volume as of 2019[5]
• 33 countries as of 2019[6]• $500 billion in scale[7]

▶ Total RMB Currency Swaps and Trade Settlement Ratio

C. Benchmark Currency/ Denominated Currency

• Increase/decrease in overseas RMB-denominated bond issuance

Nicholas Borst, Federal Reserve of San Francisco Pacific Blog, 02/21/2017.

https://www.frbsf.org/banking/asia-program/pacific-exchange-blog/offshore-renminbi-bonds-dim-sum/

• Interbank Bond Market, Increase/Decrease in Issuance of Offshore Renminbi Bonds

Analytical Credit Rating Agency (ACRA),

https://www.acra-ratings.com/research/1116#:~:text=In%202018%2C%20the%20total%20issuance,interbank%20negotiable%20certificates%20of%20deposits.

• Proportion of Foreigners in China's Bond Market[8]

D. Society for Worldwide Interbank Financial Telecommunication (SWIFT) Indicator

1. Payment Share and Ranking

SWIFT Watch RMB Tracker 2020

- Share of RMB as Payment Currency: May 2020, 1.793% (6th globally); May 2017, 1.61% (6th globally)

2. Percentage of Financial Institutions Using RMB

Additional Indicators

• As of the first half of 2019, foreign exchange transaction volume was 4.3%, and foreign exchange reserves ratio was 1.9%[9]

[1] Contrary to this dominant view, Chey and Li (2020) recently argued for the People's Bank of China's perspective that RMB internationalization can promote RMB exchange rate stability, enhance monetary policy autonomy, and facilitate reforms in China's domestic financial markets.

[2] For a discussion on the strategic use of SWIFT by the United States, please refer to Farrell and Newman (2019).

[3] https://www.mk.co.kr/news/world/view/2019/05/328166/

[4] Roberts, Cynthia A., Leslie Elliott Armijo, and Saori N. Katada. 2018. The BRICS and Collective Financial Statecraft. Oxford University Press.

https://global.chinadaily.com.cn/a/202004/30/WS5eaa0b90a310a8b241152c14.html

[5] SWIFT Watch,

https://www.swift.com/our-solutions/compliance-and-shared-services/business-intelligence/renminbi/rmb-tracker/document-centre

[6] https://chinapower.csis.org/china-renminbi-rmb-internationalization/

[7] https://onlinelibrary.wiley.com/doi/abs/10.1111/dech.12474

[8] http://www.naeil.com/news_view/?id_art=349315

[9] https://chinapower.csis.org/china-renminbi-rmb-internationalization/

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■ Author: Lee Yong-wookProfessor, Department of Political Science and International Relations, Korea University. He majored in East Asian Studies at the University of Kansas and received his Ph.D. in International Politics from the University of Southern California. His main research areas include international political economy, constructivism, East Asian regional cooperation and financial regionalism, and the multilateral trade order. His books and edited volumes include "Complex Transformation of the East Asian Regional Order and Korea's Strategy" (2014, co-edited), "Plurality of International Political Science Methodology" (2014, co-edited), and "China’s Rise and Regional Integration in East Asia: Hegemony or Community?" (2014, co-authored).

• In charge and editing : Pyo Kwang-min Senior Fellow, EAI
  
  Inquiries: 02 2277 1683 (ext. 203) I ppiokm@eai.or.kr