FameEX Hot Topics | JPMorgan Assesses De-Dollarization Risk and the Potential Rise of the Chinese Yuan as a Reserve Currency

JPMorgan recently released a comprehensive analysis focusing on the potential risks associated with de-dollarization and the likelihood of the Chinese yuan emerging as a contender to replace the U.S. dollar as the world's primary reserve currency. The report, titled "De-dollarization: Is the US dollar losing its dominance?" and published by JPMorgan's Global Research, delves into the dynamics of this evolving global economic landscape.

According to Alexander Wise, an expert in Strategic Research at JPMorgan, the theme of de-dollarization has resurfaced due to geopolitical and geostrategic shifts. The analysis outlined two scenarios that could challenge the U.S. dollar's reserve currency status. The first scenario involves adverse events that undermine the perceived stability of the dollar and the U.S.'s leadership in various domains. The second factor encompasses positive developments outside the U.S. that enhance the credibility of alternative currencies, such as economic and political reforms in China.

The report emphasizes that a potential reserve currency must be regarded as secure, stable, and equipped to meet increasing global demand for liquidity. Wise suggests that as China becomes increasingly central to global trade, the Chinese yuan could gradually gain prominence in the global economy over time. However, this transition is expected to occur over the span of decades.

Wise lists various measures that China could undertake to bolster the yuan's credibility. These include relaxing capital controls, enhancing market openness, promoting liquidity, strengthening the rule of law, reducing risks associated with appropriation and regulations, and establishing Chinese government bonds as a safe alternative asset. Such measures could position China and the yuan as a credible alternative to the U.S. dollar. The report also examines the oil markets and highlights the growing trend of oil sales being conducted in currencies other than the dollar, including the yuan. This shift challenges the once-strong influence of the U.S. dollar in shaping global oil prices.

Jahangir Aziz, head of Emerging Market Economics Research at JPMorgan, notes that the significance of the dollar has significantly diminished between 2014 and 2022. Despite these trends, the report suggests that while some degree of de-dollarization is anticipated, rapid and widespread de-dollarization is not imminent. Instead, JPMorgan predicts that partial de-dollarization is more likely, particularly with the yuan assuming a more prominent role among non-aligned countries and China's trading partners. This scenario could potentially lead to the emergence of distinct economic and financial spheres of influence based on different currencies and markets, introducing a new layer of complexity to the global economic landscape.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.