Will the dollar stay dominant?

A MILE FROM the White House stands the Capital One Arena, a 20,000-seat stadium for basketball and ice-hockey games. The arena is in the Chinatown district of Washington, surrounded by Chinese restaurants and the “Friendship Archway”, built to celebrate the American and Chinese capitals becoming sister cities in 1984. One afternoon in March, this correspondent arrived at the arena and went to buy a Diet Coke from the Walgreens opposite. Once at the till she tapped on the azure blue Alipay app: up popped a QR code, scanned by the checkout worker to collect payment. The transaction took a second.

Had it been possible to enter the stadium it would have been just as easy to use Alipay, the payment platform started by Alibaba, to buy tickets or snacks. Nor is the Walgreens in Chinatown unique in accepting the app. Around 7,000 of them across America take it, as do shopping centres like Pier 39, in San Francisco, and several Chinese restaurants in New York and Boston.

These merchants want to make shopping easier for Chinese tourists, not to persuade Americans to use Alipay. The payment app is not easy for English-speakers (even in “English” mode most of the interface is in Chinese characters, so non-natives need screenshots reliant on Google translate). But its growing acceptance outside China, where Alipay and its rival WeChat Pay process 90% of mobile transactions, augurs a shift in financial power.

The dollar is pervasive because everyone uses it as their “unit of account”. Oil is invoiced in dollars. Most global trade is paid for in dollars. Most cross-border financial contracts are in dollars. Global travellers keep $100 bills in their socks. Financial markets and trade have grown faster than the global economy for decades, making the dollar ever more dominant. This gives America a clout it exploits through its use of sanctions, as well as unrivalled insight into global finance.

It is hard to see all this giving way to the yuan. But the way a transition could start, says Jean-Pierre Landau, formerly at the Banque de France, is with tourists. “If you have hundreds of millions of tourists moving around South-East Asia, asking to use their Alipay and attracting more attention to the app then, perhaps, progressively, they might want to denominate transactions in yuan.” First knick-knacks and museum tickets are sold in yuan. Then businesses start invoicing trade in the Chinese currency. Eventually they write financial contracts in it.

Digital money could thus threaten dollar hegemony. But the motive of many places, including China, for issuing their own digital currencies are mainly defensive. China is resisting the disappearance of public money as cash falls out of use. It is also fighting the concentration of power in the hands of data-savvy tech firms. Perhaps digital money will be used to promote a currency, says Mr Landau, but it can also be a defence against competition from a digital dollar.

A first reason to create a digital currency is “to protect or safeguard our monetary sovereignty,” said Mu Changchun, the Chinese central bank’s digital-currency boss, in March. He thinks most central banks are keen because they fear a digital dollar. “Digital currency supplied by one central bank should not impede another central bank’s ability to carry out its mandate for monetary and financial stability,” he said.

Indeed, if internationalisation were their goal, it is difficult to see how China’s tighter restrictions on Tencent and Ant would help to reach it. Since 2018 they have had to clear all mobile payments through a central clearing party, in effect overseen by regulators. The government has also demanded that they hand over data on their customers’ transactions and borrowing. “You have to think twice before allowing a payments network with its headquarters in China, where privacy laws are different,” comments Mr Landau.

“There are two possible rationales for the government to intervene in this way,” says Markus Brunnermeier of Princeton. “The first is that big tech firms should not monopolise the data, and one way to do that is to have them give it to the government...the second is surveillance by the government.” Another is to maintain capital controls. A third of economists polled by Mr Brunnermeier think capital controls are an insuperable obstacle to internationalisation of the yuan. Yet it is clear that the Chinese authorities are desperate to keep them, even at the expense of the currency’s international role.

A bigger risk is what happens when other currencies go digital. Had Diem, the idea proposed by Facebook, been operating when Turkey’s president sacked the head of its central bank in March, it would have been easy for millions of Turks to move their money into dollars or euros. It might also have been possible for businesses to start showing QR codes to accept dollars.

“It feels very significant that the countries which, apart from China, are most advanced, most active and most interested in CBDCs are the medium-sized emerging economies,” says Mr Landau. “They are too big to accept the loss of monetary autonomy, and sufficiently small to be exposed to the risk of foreign-currency competition.” They may feel they have no choice.■