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Illustration: Aïda Amer/Axios

China appears to have taken another major step in its quest to move the world away from the dollar and position itself as a major power in the world's financial markets.

What happened: China's central bank has set up a partnership with SWIFT, the global system for cross-border payments, through its digital currency research institute and clearing center.

Why it matters: The move has sparked "speculation over the central bank's pursuit of promoting the global use of its digital currency," China's state-operated Global Times wrote on Thursday.

The big picture: China is far ahead of the U.S. in the development of a central bank-backed digital currency and as such could be far ahead in the future of global payments and financial settlement.

  • If China can cement the yuan as the world's favored digital currency, it could displace the dollar and provide China with the immense global privileges that have been enjoyed by the U.S. since the end of World War II.

Be smart: The lack of financial transactions in and broad use of its currency is the greatest detriment to China amassing global power.

  • The country has been opening up its financial markets and now has mainland stocks listed on top international exchanges like MSCI and its government bonds have been added to the global benchmark Bloomberg and JPMorgan bond indexes.
  • In 2020, China drew double the amount of foreign capital to its yuan-denominated government bonds as the year before.

On the other side: The ability of the U.S. to borrow money at will in international debt markets and to impose sanctions on countries it sees as hostile are both largely dependent on the dollar's status as the world's funding currency.

  • The use of the SWIFT system is a major conduit to imposing sanctions.

Where it stands: Federal Reserve governor Lael Brainard said in a speech in August that the Fed was working to build and test a "hypothetical" central bank digital currency, noting that CBDCs "present opportunities but also risks associated with privacy, illicit activity, and financial stability."

  • European Central Bank president Christine Lagarde was similarly ambivalent about the development of a CBDC in January, saying it was "going to take a good chunk of time to make sure it's safe," adding, "I would hope that it's no more than five (years)."
  • China has already rolled out tests of its digital yuan in several Chinese cities, testing payments with real customers in real stores.

Yes, but: Axios China author Bethany Allen-Ebrahimian points out that having the first-mover advantage isn’t necessarily an advantage in implementing digital currencies because technologies are changing so rapidly.

Go deeper

Dave Lawler, author of World
Feb 5, 2021 - World

How Emmanuel Macron sees the China challenge

Macron and Xi in 2019. Photo: Jason Lee - Pool/Getty Images

French President Emmanuel Macron reiterated his call for European "strategic autonomy" at an Atlantic Council forum on Thursday, saying, “Our duty, definitely, is not to put ourselves in a situation to depend on a U.S. decision.”

Why it matters: It will disappoint some in Washington to hear Macron apply that framework to competition between the U.S. and China.

Dave Lawler, author of World
Feb 4, 2021 - World

President Biden's first foreign policy address: "America is back"

Photo: Jim Lo Scalzo/EPA/Bloomberg via Getty

“America cannot afford to be absent any longer from the world stage," President Biden declared on Thursday in his first foreign policy address since taking office.

The big picture: Biden argued that by emphasizing democratic values, recommitting to alliances and investing in diplomacy, the U.S. could rebuild its global leadership and out-compete China.

Dion Rabouin, author of Markets
Feb 4, 2021 - World

Trouble brewing in the eurozone

Illustration: Sarah Grillo/Axios

Increasing lockdowns, a mutating virus and a botched vaccine rollout have the eurozone headed for a double-dip recession, weighing heavily on its currency and pushing the dollar higher.

Why it matters: The weak dollar (down 10% from its 2020 highs) has been a linchpin for some of the biggest consensus trades this year — strong commodities, skyrocketing U.S. equity prices and emerging market stocks and bonds.