Illustration: Tang Tengfei/GT

 

Editor's Note:

As the US dollar continues its weakening trend, the bearish consensus and the forecast of a potential collapse of the greenback have expanded its grounds among Chinese analysts. In interview with the Global Times, Chinese experts share their argument on why it's difficult for the US to prevent a plunge in the value of dollar and what preparations are needed in advance for economies to cope with related risks.

Gao Desheng, senior executive vice president of Bank of China Johannesburg Branch



The US dollar dominance in global economy is rooted in the currency's credit based on the US' economic strength. However, the US' unlimited quantitative easing (QE) and surging debt levels designed to stimulate its coronavirus-stricken economy has severely eroded the credit of the currency.

Since the COVID-19 pandemic took hold in the US, to stimulate the plunging stock market and prevent a long-term economic recession, the US government has significantly expanded fiscal expenditure and the US Federal Reserve (Fed) has started unlimited QE, injecting excessive liquidity to global economy.

The dollar has been falling steadily since last March. It is down about 12 percent relative to America's major trading partners, and experts believe that there is more to come.

In an article published in January, Stephen Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia who in September 2020 forecasted that dollar will collapse by the end of 2021, has stuck to his bearish forecast.

The inflation of the US debt, the actual negative interest rate of the dollar, the spread of the pandemic and the gloomy economic prospects have changed the flow of international funds. It has become doubtful whether the US' financial game which has been played for decades can be sustained. It seems only a matter of time for the US dollar to end its hegemony.

Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies of Renmin University of China

The US government's excessive release of liquidity is highly likely to trigger a sudden plunge of the value of dollar. Against the backdrop of mounting downturn pressure and the severe blow from the COVID-19 pandemic, the US government and Fed both agreed to take the stimulus measure supported by unlimited QE, which is widely deemed as unbalanced approach.

Excessive liquidity combined with a lack of the support from real economy is bound to bring serious side effects. Even the approach could help the US economy endure current predicament, the followed problems of recall the liquidity from market and to pay back the surging debts still requires proper solution.

It is still too early to give an optimistic forecast on the US economy prospects this year. The structural problems within the US economy for a long time are still not addressed, and the manufacturing has not been brought back to the US. The US' participation in global economy is still not sufficient. A weak economy and poor employment are not conducive for the dollar to reverse current weakness.

Additionally, emerging economies including China are improving economic strength, which will support these economies' currency to go strong. The shift and reshuffle of global currency system is bound to happen, in which dollar will see a weakening trend. During the weakening process, it's crucial for the US to carry out cooperation with other major economies to remain the stability of global financial system.

Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences



The dollar continues its weakening trend against yuan in the first two months of this year. As of Tuesday, the yuan's reference rate against dollar has risen to 6.47 from the level of 7.13 at the beginning of June 2020.

As an increasing number of analysts now believe the downward trend of the greenback is expected to continue, which may transform into a collapse during 2021, all economies should make necessary preparation for the potential impacts from the sudden plummet of the value of the US dollar.

Although Chinese currency yuan's reference rate against dollar is still in the normal range of 6.1-7.1, within which yuan has mainly fluctuated over the past decade. It's crucial for China to make necessary preparation to prevent risks.

In terms of exchange mechanisms, China could use "countercyclical factor" adjustment to prevent the yuan from appreciating too rapidly. From the perspective of macro economy, China could use the potential of domestic demand to offset the appreciation's impact on the real economy. In terms of financial market operation, it is necessary for financial regulatory authorities to launch foreign exchange futures products as soon as possible to provide enterprises with diversified financial hedging tools to prevent risks.

The internationalization of the Chinese currency has a significant role in preventing the risk of yuan appreciation. The use of the yuan for export settlements by Chinese enterprises can help reduce the negative impact of exchange rate changes.