China moving away from US dollar?

China moving away from US dollar?Amid unconfirmed reports suggesting that China is set to introduce its own digital currency as a move to counter the dominance of the US dollar, Indian experts said that there was no need to panic at this point. While India needs to be watchful, it must avoid kneejerk reaction.

China, the prime exporter of goods in the world, is currently under the spotlight for the way it has handled the spread of the deadly coronavirus and therefore at this stage it is unlikely to take such a major step.

Not only did China fail to arrest the spread of the disease within its own territory, it failed, or chose not to warn the world about the implications of the killer disease. With over three million people across the world infected and lakhs dead with the novel coronavirus, economic activities across the globe have come to a standstill. There is a looming fear that the world could witness one of the worst recessions after the Great Depression.

Trade experts said that the US dollar is still the most preferred currency for trading activities and global transactions. With more and more countries now questioning China’s role in the Covid-19 pandemic, the world’s most populous country may find it difficult to alter the currency preference pattern for trading.

Besides, the Chinese currency is not market driven, which makes it less attractive for trading. “Chinese currency is not market driven, so most other countries would not want to trade in such a currency. At this point, there is no cause for concern for India but, at the same time, we need to be careful and be ready with adequate measures,” Ajay Sahai, director general and CEO, Federation of Indian Export Organizations, said.

Many companies with manufacturing facilities in China have already evinced interest in shifting out of China, which id getting more and more isolated in the global scheme of things.

However, it is important to note that China has been keen on launching its own digital currency for some years now. The move, many experts say, will challenge the dominance of the US dollar, as it will provide an alternative to the American currency.

The People’s Bank of China—the central bank of the country—has been working on the currency, though it has not announced any specific launch date. However, unconfirmed reports have suggested that China has begun piloting its new digital currency in four of its cities including Shenzhen, Suzhou and Chengdu. It efficacy within and outside the country is yet to be ascertained.

“Though the launch of the currency has been in the works, with the global tide suddenly going against China, the latter may not find it favorable at this time to take the plunge,” an analyst said.

While the American dollar was used for almost 90 per cent of the international transactions in 2019, the currency is also used for over 60 per cent of all foreign exchange reserves. The Chinese yuan accounts for a minuscule proportion of global trade and payment.

Besides, China’s debt-to-GDP ratio—the metric comparing a country's public debt to its gross domestic product (GDP)—stood at over 300 per cent and makes up for about 15 per cent of the global debt, according to a report published by the Institute of International Finance.

Therefore, India needs to adopt a wait-and-watch policy as China accounts for global exports of over $$2 trillion annually and there is no way we can remain complacent about it..