China doesn’t need to de-throne the dollar to win global currency war

Policymakers, regulators, bankers, investors and financial executives gather in Shanghai every June for the Lujiazui Forum, China’s premier financial policy conference. If Davos is where global elites debate the future of the world economy, Lujiazui is where Beijing increasingly signals how it intends to shape that future to serve its interests. As Americans, I believe this year’s forum deserves our attention, even though our current focus is divided across the board.

At this year’s Lujiazui Forum, Chinese officials unveiled a series of measures designed to expand offshore renminbi (RMB) financing, deepen Shanghai’s role as an international financial center, create new liquidity opportunities for foreign central banks and independent investors, expand cross-border RMB trade, and further open parts of China’s financial sector to international participation.

It is true that we have heard this many times before, and it is understandable that for skeptics and many observers there may be doubts about its sincerity or attainability. Is China finally ready and serious to challenge the US dollar? The answer is that China is unquestionably serious about the coercive aspects of dollar dominance, but this is also the wrong question.

I argue that the world’s focus should not be on whether China can achieve its real goal of replacing the dollar with the renminbi. The world should focus more on the fact that Beijing continues, step by step, to methodically build the financial infrastructure necessary to reduce its dependence on the dollar-centered global system and create alternatives to American financial power for other countries. So China is serious, but it may not achieve its goals, at least not quickly. But what it has done is position itself as a serious competitor and disruptor of the dollar’s dominance.

This is not primarily a financial story. It’s a geopolitical situation.

For nearly eighty years, the United States has reaped extraordinary benefits from the dollar’s central role in the global financial system. The dominance of the dollar has given Washington tools of statecraft undreamt of by previous great powers. The United States can impose sanctions, restrict access to dollar exchanges, shape international compliance standards, influence capital flows, and strengthen its position within the world’s financial architecture to advance national security goals. China understands this fact as well as anyone, and like many countries, has been angered by this massive concentration of power for decades.

Today we are in a better position than ever to do something about it.

Renminbi’s twenty-year internationalization plan reaches new phase

The Chinese leadership has spent nearly two decades internationalizing the Renminbi. Beginning in the wake of the 2008 global financial crisis, Beijing introduced RMB trade settlement programs, established offshore clearing centers, expanded currency exchange regulations, developed alternative payment infrastructure, and gradually opened some of its capital markets.

This has not been a silver bullet that could eliminate or weaken the dollar’s dominance. But China’s story is rarely about urgency and speed. It is about methodological stability and incremental progress. The latest measures announced in Lujiazui are the latest chapter in this long story. What makes this year’s statements particularly remarkable is that they coincide with the first year of China’s 15th Five-Year Plan being implemented. China is wasting no time in getting this part of the plan off to a solid start, and that’s important.

Western observers sometimes view Chinese planning documents as wish lists, propaganda documents, or a compilation of ambitious ideas created on a whiteboard. Beijing looks at them differently. Five Year Plans are not marketing brochures. These are resource allocation documents that shape regulatory priorities, guide state-owned enterprises, influence lending decisions, direct provincial governments, and point to strategic priorities across the Chinese system.

It is therefore important to remind policymakers, investors and businesses that the new 15th Five-Year Plan raises financing to the level of a national strategic goal. Chinese leaders have repeatedly declared the goal of turning China into a “financial powerhouse”, strengthening Shanghai and Hong Kong as international financial centers, expanding offshore RMB markets, improving cross-border payment infrastructure, and steadily advancing the internationalization of RMB.

More importantly, these goals are no longer just a matter of debate among Chinese economists. These are now included in China’s primary national planning document; This means that regulators, state banks, state governments, and financial institutions can all be expected to align resources and policy decisions to support these goals. Whether these efforts will ultimately be successful is an important question. But whether Beijing intends to pursue them relentlessly and aggressively is not up for debate.

Wall Street rejects threat at its own peril

The world has seen this movie before. Many Western analysts initially dismissed Made in China 2025-related targets. Critics pointed to technological shortcomings, market distortions, misallocation of capital, inefficient state intervention, corruption and questions of implementation. All these concerns were reasonable at the time. But Beijing has continued to move forward slowly but deliberately by implementing industrial policy, increasing subsidies, directing banks to use state financing, establishing aggressive purchasing preferences, focusing universities on training engineering and technology talent, and providing preferential regulatory support to achieve its goals.

The result was not perfection. But this was enough to help China establish globally significant positions in numerous strategic sectors. In fact, many will recall that it was the growing success of Made in China 2025 that triggered the first Trump administration’s 2018 trade war. The lesson here is not that Beijing always succeeds or succeeds very quickly. The lesson is that Beijing rarely abandons strategically important goals once they are incorporated into national planning documents and long-term competitive strategy.

This fact deserves more attention in Washington, Silicon Valley, and especially Wall Street. Many investors will understandably view the Lujiazui announcements as a positive development. Expanded offshore RMB trading, new liquidity opportunities, deeper bond markets and greater access to Chinese financial products create opportunities for global capital. But investors need to be careful not to confuse these moves with China’s aim to fully open its capital account and allow capital flows to move solely based on market fundamentals.

China is not making these reforms just to please Wall Street or to prove that it has become a fiscally liberal economy. Rather, these measures are intended to reduce China’s exposure to US financial influence and create greater strategic freedom of action to pursue its interests on the international stage. As a result, geopolitical risks surrounding China-related financial risks are likely to increase, not decrease.

Right now, China hawks in Congress are silent or being silenced by Trump. They will tell you privately that they don’t like China policy, but they won’t say it openly. But Congress is unlikely to remain on the sidelines indefinitely. During the Biden administration, Congress has paid increasing attention to outbound investment screening, pension fund risk, index provider decisions, and the role of American capital in supporting Chinese firms linked to strategic industries. Outbound investment screening remains unfinished business in Washington, and future efforts to expand screening authorities could draw greater scrutiny on U.S. financial involvement in Chinese markets.

If Democrats regain control of the House of Representatives or Republican China hawks gain political momentum, lawmakers could revive aggressive legislation focused on strategic competition with China. Oversight of Wall Street’s presence in China will almost certainly be part of that conversation.

Senator Elizabeth Warren has repeatedly expressed concerns about financial relations with China. At the same time, Republican China hawks continue to advocate, often quietly, for tougher restrictions on capital flows into sectors seen as supporting China’s military modernization or strategic competition. The result is an unusual bipartisan rapprochement. Progressive skeptics of the U.S. national security establishment and national security hawks often disagree on almost everything. Increasingly, suspicions of certain forms of financial interaction with China are becoming one of the few areas where their interests align.

But many countries outside the United States seem likely to welcome the news from Shanghai. Recent geopolitical events may accelerate China’s efforts and increase its appeal among the Global South, the Middle East, and even some allies and partners such as Canada and various ASEAN countries. The Iran conflict, concerns about sanctions enforcement, disagreements surrounding U.S. trade policy, and broader questions about the future of globalization and the weaponization of the dollar have encouraged many governments to seek greater strategic flexibility. The Trump administration’s erratic and often aggressive actions have raised concerns about over-reliance on a single financial system.

This does not mean that countries want to give up the dollar completely. This does not mean that they want to be dependent on China. Many people remain deeply skeptical of Beijing and its intentions. This means that many people now find hedging as an alternative more attractive than at any point in the last eighty years. China understands this, and that is precisely why Beijing sees a wider window of opportunity. China does not need the renminbi to replace the dollar to achieve a strategic victory. In fact, Beijing’s goal may be much more modest and therefore more achievable: to create sufficient alternatives so that countries no longer feel obliged to rely solely on the dollar-based system. It just needs enough countries, institutions, and investors to sustain a viable alternative.

A world in which a meaningful portion of trade, energy transactions, sovereign reserves, development finance, and cross-border payments can operate outside traditional dollar channels is strategically different from the world that existed just a decade ago. This possibility is the real significance of the announcements made at the Lujiazui Forum in Shanghai. So the question facing Washington is not whether Renminbi will be the next dollar. The question is whether the United States is paying enough attention to a rival that has officially declared its intention to become a financial powerhouse and appears ready to devote the next five years to making that ambition a reality.

—With Dewardric McNealmanaging director and senior policy analyst at Longview Global and CNBC contributor