JPMorgan Analyzes De-Dollarization Risk, Potential for Chinese Yuan to Displace US Dollar as Reserve Currency

JPMorgan Analyzes De-Dollarization Risk, Potential for Chinese Yuan to Displace US Dollar as Reserve Currency – JPMorgan recently conducted an assessment concerning the challenges associated with reducing reliance on the U.S. dollar and the likelihood of the Chinese yuan taking over as the predominant global reserve currency. 

The esteemed international financial institution suggests that the renminbi may start to perform some of the existing roles of the dollar, particularly among nations not aligned with the United States and China’s trading associates. JPMorgan’s Global Research published a report, titled “De-dollarization: Is the US dollar losing its dominance?”

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Alexander Wise, who covers Strategic Research at JPMorgan, described: “The risk of de-dollarization, which is a periodically recurrent theme throughout post-war history, has returned into focus due to geopolitical and geostrategic shifts.” JPMorgan presented two situations that have the potential to diminish the U.S. dollar’s standing as the world’s primary reserve currency.

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“The first includes adverse events that undermine the perceived safety and stability of the greenback — and the U.S.’s overall standing as the world’s leading economic, political, and military power,” the global investment bank detailed. “The second factor involves positive developments outside the U.S. that boost the credibility of alternative currencies — economic and political reforms in China, for example.”

The report also delves into alternative currencies as substitutes for the U.S. dollar. “A candidate reserve currency must be perceived as safe and stable, and must provide a source of liquidity that is sufficient to meet growing global demand,” Wise noted. Regarding whether the Chinese yuan (renminbi) could displace the USD, the analyst detailed: “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.” 

He added: “Relaxing capital controls, opening markets, implementing measures to promote market liquidity, bolstering the rule of law, reducing appropriation and regulatory risk, and promoting Chinese government bonds as an alternative safe asset — these could all cement China and the renminbi as a credible alternative to the U.S. and the dollar.”

The report also discusses de-dollarization in oil markets, stating: “More oil sales are now being transacted in non-dollar currencies such as the renminbi.” Natasha Kaneva, head of Global Commodities Strategy at JPMorgan, pointed out: “The U.S. dollar, one of the key drivers of global oil prices, appears to be losing its once powerful influence.”

Jahangir Aziz, head of Emerging Market Economics Research at JPMorgan, stated: “Overall, we find that the importance of the dollar has declined significantly from 2014 to 2022.” Regarding whether de-dollarization is imminent, JPMorgan said: “While marginal de-dollarization is expected, rapid de-dollarization is not on the cards.”

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The global investment bank continued: “Instead, partial de-dollarization — in which the renminbi assumes some of the current functions of the dollar among non-aligned countries and China’s trading partners — is more plausible, especially against a backdrop of strategic competition.

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According to JPMorgan’s analysis, this trend has the potential to gradually foster the development of regionalism. This regionalism would entail the emergence of distinct economic and financial spheres of influence, characterized by the dominance of particular currencies and markets. 

In such a scenario, these regional economic hubs would take on central roles, shaping the financial landscape and dynamics within their respective areas. This shift towards regionalism could have significant implications for global finance, as it may lead to the diversification and fragmentation of international financial markets, with different regions exerting varying degrees of influence on the global stage.

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