China Takes Another Step Away From USD Hegemony

Yuan	2020-1-2 11:01

The China Foreign Exchange Trade System (CFETS) announced that effective January 1, 2020, the system “will adjust weights for CFETS RMB Index,” decreasing the weighting of the USD for the second time in the currency basket’s history from 22.40% to 21.59%, and increasing the Euro from 16.34% to 17.40%. The change could signal further disassociation with USD due to ongoing U.S./China trade difficulties. Also, reports of increased trade with the EU over 2019 and the fact that both China and the European Union are actively working on central bank digital currencies (CBDCs), have some speculating that dollar hegemony is being challenged by the move.

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CFETS Adjusts Yuan Index

The CFETS yuan index has been around since 2015 and aims to measure the yuan’s performance against a basket of 24 currencies. The newly announced adjustment will see the influence of USD over this basket trimmed back for the second time since its creation. The last time the currency saw its weight diminished was in January 2017, falling from 26.40% to 22.40%. The 2020 cutback sees the dollar fall again from 22.40% to 21.59%.

The euro, on the other hand, remains the second largest currency in the basket, and will see its influence rise from 16.34% to 17.40%. The official announcement states that the change is due to updated trade data, and according to Chinese news outlet Global Times “shows the fading role of the dollar in the currency basket as the trade war between the world’s top two economies has weighed on bilateral trade.”

Also taking a hit will be the fourth largest currency in the basket, the USD-pegged Hong Kong dollar, falling from 4.28% to 3.57%.

Trade Tensions and CBDC Development

The ongoing trade and tariff war between the U.S. and China may see some changes with the upcoming “phase one deal,” which could be signed this month, bringing a proposed reduction of U.S.-imposed tariffs on Chinese goods in exchange for purchase of American agricultural products. It is not certain whether the deal will go through. Relations with China’s biggest trading partner, on the other hand, appear to be thriving.

“The nation’s yuan-denominated trade with the EU, China’s top trading partner, posted a rise of 7.7 percent in the first 11 months [of 2019], per Chinese customs statistics,” Global Times reports. The Chinese government’s relationship with the EU is interesting, especially given that both the EU and China are actively working on implementing central bank digital currencies. The ECB recently published a report on their hypothetical “Eurochain” network, and China appears to be ready for pilot testing of the digital yuan. This in stark contrast to the perceived cold feet of U.S. financial planners when it comes to creating a digital version of the greenback.

Whether CFETS adjustments signal broader intentions related to these areas is yet to be seen, but the fact that Chinese authorities are measuring the strength of the yuan now less relative to USD — at least where the trade index is concerned — has been clearly demonstrated. The CFETS Bank for International Settlements (BIS) index also notably saw changes this time around in replacing the Venezuelan bolivar with the Icelandic krona.

What are your thoughts on the CFETS index adjustment? Let us know in the comments section below.

Image credits: Shutterstock.

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