With the rise of China’s renminbi (RMB) and its internationalisation, a question naturally arises as to whether the US dollar (USD) as the world’s reserve currency can still be sustained sometime in the future.

This is inextricably linked to geopolitics and geoeconomics.

Here in Malaysia, should the ringgit depreciate drastically against the USD, our headline inflation may hypothetically spike from the present figures of between -1.5% and 0.5% to beyond the projected figures of between 1% and 3%. This is because of our dependence on food imports.

Such a scenario may result in inflation outpacing our gross domestic product’s expected recovery of between 5.5% and 8% as projected by Bank Negara for 2021. We have to hope that our current account surplus widens further on the back of manufacturing, tourism and not least, high enough oil prices on the back of a weaker ringgit.

In recent years, a weaker currency has been a part of the competitive devaluation trend against the USD.

Our currency’s value relative to the USD inevitably plays into the geoeconomics game that is all about entrenching the USD’s hegemonic status for a long time to come.

Now, we see this played out in President Donald Trump’s rebalancing policy under the auspices of the “America First” agenda, resulting in protectionist measures by way of slapping import tariffs on China-made or China-origin goods.

Parallel to the Triffin Paradox under the gold standard exchange, reducing the US’ trade or current account deficit with China actually strengthens the USD.

The Triffin Paradox means that sustaining the USD as the world’s reserve currency requires the US to run external deficits against the rest of the world continuously. This tends to weaken confidence in the value of the USD which leads to increased demands for convertibility back into gold.

It will eventually lead to the unravelling of the entire international payments system with the USD as the world’s reserve currency, as happened in 1971.

Back then, Richard Nixon took the US off the gold standard exchange in order to deficit finance the Vietnam War. This currency decoupling in turn led to the rest of the world following suit, heralding the era of fiat currencies.

China’s holdings of US Treasury bills, therefore, do not affect the US’ ability to deficit finance. It simply means the less holdings China has, the less debt the US needs to issue to repay, which in turn reduces the capital account deficit. This means there’s less demand for USD to be converted into yuan and hence the argument that it maintains the USD as the world’s leading reserve currency.

As for quantitative easing (QE), which means that the central banks of the US, the UK and Japan engage in bond buying at the secondary markets, it ensures that yields remain low on the longer end (long-term maturity) of the yield curve.

This has also resulted in geopolitical and geoeconomic repercussions. Lower interest rates in the US encouraged capital to seek higher returns in both fixed-income and equity in emerging markets. This will result in unnatural appreciation in the value of assets, leading to the real estate bubble worldwide that we saw just before the global financial recession (GFC) of 2008.

Cheaper borrowings resulted in speculative activities in commodities, including staple food imports such as wheat, which fed into the escalating food inflation in the importing countries that ignited the Arab Spring in the aftermath of the 2008 GFC.

But QE also entrenched the dominant status of the USD by rallying the domestic stock market. The corporate share buy-backs, for instance, increased the dividend pay-outs which transmitted into consumer sentiment that re-established the pattern of imports from the rest of the world.

In other words, QE with its depreciating impact on the USD didn’t portend the end of the currency’s dominance. On the contrary, QE enabled a new round of USD-based activities to influence the global financial markets with economic ramifications.

However, China had begun concerted efforts aimed at the internationalisation of the RMB. Its entry into the World Trade Organisation in 2001 marked its maturing into a full-fledged member of the international economic order. This could be seen in the bilateral swap arrangements and cross-border settlements in RMB which, among other things, minimise transaction costs.

The UK’s openness in 2011 to host an off-shore centre for the internationalisation of the RMB boosted the currency’s status vis-à-vis the USD.

More recently, the One Belt, One Road mega-project spanning three major continents and the world’s longest modern land bridge as well as China’s growing outreach and debt diplomacy to Africa and the Pacific served to elevate the status of the RMB as a potential rival that can challenge the USD’s currency dominance.

However, it could be argued that the backlash from debtor nations in response to what is known as “debt trap” has somewhat diminished and contained the RMB’s prestige.

All in all, the USD will continue long into the foreseeable future as the world’s reserve currency even amid QEs and the internationalisation of the RMB.

Jason Loh Seong Wei is head of social, law and human rights at EMIR Research.

The views expressed are those of the author and do not necessarily reflect those of FMT.