Impact of U.S. Tariffs and the Rise of e-CNY
The highest tariffs imposed by the U.S. in almost a century have had a limited effect on global economic growth so far. Nonetheless, Asian policymakers aren’t backing down. They seem to be strategizing a push against the dominance of the U.S. dollar. It’s an interesting comparison—back in the 1960s, the French merely vocalized their frustration over America’s privilege, while now, China might actually be gearing up to offer competitive aid options.
Those looking to observe this shift in payment methods might be mistaken. The real movement toward de-dollarization is likely to remain subtle, manifesting gradually in changes to financial systems over the years. The cumulative impact takes time to materialize.
In a quiet yet significant shift, China’s digital currency, e-CNY, moved from being an interest-free cash alternative to a genuine high-yield product for banks. That’s a considerable transformation. Up until now, even state employees, who received their salaries through e-wallet tokens, would immediately deposit them into traditional bank accounts. But now, there’s no longer a necessity for that. For these employees and their banks, e-CNY is essentially a regular savings option. Popular apps like Alipay and WeChat Pay are compatible with both e-CNY and traditional currencies.
Despite this progress, the dollar still reigns supreme in global payments, accounting for over 50% of transactions—significantly more than the euro and far above the mere 3% of the renminbi. Yet, the increased use of e-CNY within China could mitigate the risk of local savers turning to dollar stablecoins, which are equivalent to the U.S. dollar on blockchain. By offering interest on e-CNY, China is proactively safeguarding its position, especially since recent U.S. legislation has restricted stablecoin issuers from providing any yield.
However, relying solely on internal measures isn’t a complete solution. For China to challenge dollar dominance more aggressively, it needs to expand its influence beyond its borders. Assuring liquidity in the renminbi remains a hurdle, especially outside Hong Kong, where banks facilitate renminbi-denominated trade finance for clients in countries like Indonesia and Cambodia.
This brings us to the mBridge project. Initially discussed in 2022 as a pilot involving the Bank for International Settlements and monetary authorities from China, Hong Kong, Thailand, and the UAE, it aimed to create a framework for cross-border transactions using central bank digital currencies. In 2024, Saudi Arabia participated in this experimental payments platform. Although it initially received limited attention, significant mentions arose when Russian President Vladimir Putin identified it as a tool against sanctions which could threaten the dollar’s stability. The BIS withdrew from the project by 2024, but collaborating countries continued. Since its launch, cross-border transactions have surged, exceeding 4,000 with a total estimated value of around $55.49 billion, reflecting a massive increase from 2022, with e-CNY making up over 95% of this total.
There are whispers regarding mBridge evolving further. India, which has launched its own digital currency, is reportedly considering a partnership within a broader BRICS+ framework. This concept could be contentious for the U.S. Interestingly, India had ceased its Russian oil imports amid the crisis. It remains to be seen whether enthusiasm for a payment channel that could also involve Russia and Iran will endure under U.S. scrutiny.
China will likely persist in its efforts, even if establishing a robust anti-dollar coalition takes time. Just a few years back, President Xi Jinping voiced the goal of creating a “strong currency” that could be widely accepted in international trade—a sentiment many would have dismissed as mere rhetoric. However, that perspective has shifted. Markets are starting to challenge the idea of dollar exceptionalism. Some researchers point to the remarkable rise in U.S. bond yields alongside the tariff wars as evidence that investors are losing faith in long-term government bond safety, with increased interest in gold.
Nevertheless, gold isn’t a practical currency for transactions in the current global landscape. The U.S. dollar is still the prevailing currency, involved in 89% of transactions in the vast $9.6 trillion daily foreign exchange market. A significant portion of these transactions first converts funds to dollars and then back to the recipient’s currency. The introduction of tokenized, interest-earning e-CNY aims to facilitate transactions both domestically and internationally, potentially circumventing the dollar entirely. With these advancements, there’s a pressing need for efficiency in financial transactions moving forward.
