But, in my opinions: 1) the supposed trilemma is questionable, one reason it actually about trade-offs, not absolute exclusions. While a full full blast of all three might create unsustainable tensions, in practice, in some ways or others, all three, or maybe even any, are probably not fully there anyways and partial measures or compromises allow for varying degrees of each. For example, countries can adopt managed exchange rate regimes (like crawling pegs or currency bands) that offer stability without being full fixed. Also, capital flow management, such as forms of capital controls, capital inhibitors, or macroprudential regulations, permit partial openness without sacrificing all monetary policy autonomy. Amongst other things.
And more importantly, 2) in my view the biggest threat to King Dollar is the same biggest threat to the highly globally extractive planetary financial-economic system in general: a wave of sudden -- not necessarily violent -- true and real political change in the so called developing nations
1) The trilemma is a theoretical concept based on strict assumptions in economics. In practice, this gives some countries very little choice. China is working to reconcile the "impossible trinity." Your reply highlights the nuanced approaches possible in real-world scenarios.
2) Maybe there's also another threat to consider: technological revolution. Blockchain-based digital assets are here to stay.
Liu Yifan raises a very important question. How can China support de-dollarization while the currency of Hong Kong - China’s offshore financial hub and entrepot - is pegged to the US dollar? I live in Hong Kong and remember that in colonial times the city was described as “a borrowed place living on borrowed time.” After its return to the motherland in 1997 HK is no longer a borrowed place, but the sense of living on borrowed time hasn't completely disappeared, people are still anxious about the fate of its currency. We try to hedge the risk with dual currency deposits and savings, in yuan and HK dollars, but we fear that is not a long-term solution. As i applaude efforts to reduce the use of the US dollar in international trade, i wonder what the impact on the HK dollar is going to be. And i am not the only one. As to the rise of alternative payment systems to bypass Western sanctions, they are still unavailable to the general public. When I travel to Russia i can't use my Union Pay card because it is issued by a HK bank that abides by the sanctions. It's a negligible problem because i am not a big spender and cash is accepted everywhere i go, but it might be a deterrent for some people. Those who are doing business with Russia face bigger obstacles when it comes to making and receiving payments. However, these obstacles are not insurmountable, Russian-Hong Kong trade is steadily growing.
Hi Laura, thank you for sharing your insights and personal experiences - they add valuable perspective to the discussion.
This reminds me of 2022, when I was assigned to write a newspaper story reviewing the HK-US dollar peg amid growing concerns about the greenback’s dominance following Washington’s sanctions on Russian banks. At that time, the IMF, Goldman Sachs, and several experts were bearish on the US dollar outlook.
While reviewing data and reports, I found that public discussions about decoupling the HK dollar from the US dollar were more prevalent 10 years ago. (In 2012, the former Monetary Authority chief suggested that the HK dollar might need to be re-pegged to RMB or even allowed to float; In 2014, then Asia-Pacific chief of HSBC, also called for a review.) That’s probably because the Chinese RMB almost rose every day.
For Hong Kong, the US dollar peg isn’t ideal as the city's economic cycles are not aligned with those of the US. But currently, there’s no alternative. We residents and businesses feel the pains of it.
In my view, it’s still true that the dominance of the USD and any potential HKD unpeg won't change overnight - it could take decades. However, the use of other currencies like the RMB and cryptocurrencies is on the rise, and some kind of imagination is needed to realize the unpeg step-by-step. I’m sure the Chinese officials have all along been discussing the future of the HKD given the public debates over decades. Probably decentralized CBDC projects will be part of the plan.
Thank you, Yifan. I remember that discussion over ten years ago, when the risk-benefit analysis of unpegging the HKD was being conducted. Now the Greater Bay Area is more connected, regional integration has strengthened and yet the debate about our currency has apparently fizzled out. I agree with your assessment that it will take a long time to find a solution. Pegging the HKD was definitely easier than unpegging it. Meanwhile it causes a lot of distortions.
China must keep capital controls especially now as the money vultures are eagerly looking for any crack they can slip into. It's nice to consider that trading in national currencies could obviate the necessity of any kind of SWIFT-like system. After 75 years of operation, the world monetary/economic system will not be circumvented easily or quickly. New thinking is desperately needed to get outside the box. This will be the biggest shift of all.
The creation of alternative international messaging/settlement/payment systems is desirable only insofar as existing systems are open to manipulation and coercion by their existing users. For example were SWIFT utterly impervious to political pressure, and instead simply an incorruptible means of facilitating financial transactions, alternative means of settlement would be unnecessary.
However the reality is that SWIFT is being used as a financial bludgeon by Western nations to coerce other nations to act in accordance with their political wishes. This is a fatal flaw in any system of reliable financial transactions, which virtually by definition must be independent of political considerations. Therefore alternative systems will arise roughly in proportion to the degree that SWIFT is used in a political manner. And this is probably a healthy thing, as monopolies are generally negative in the economic sense.
Other financial payment systems will prosper in proportion to their freedom from political influence.
Thanks for this. The Kazan Declaration is very muted in its language, hinting at de-dollarisation but not as a direct challenge to the US. The main take away from the BRICS is its aspirations for Global South resource rich former colonies to pursue a path of financial self determination. I write about this on my substack.
Well written and interesting!
But, in my opinions: 1) the supposed trilemma is questionable, one reason it actually about trade-offs, not absolute exclusions. While a full full blast of all three might create unsustainable tensions, in practice, in some ways or others, all three, or maybe even any, are probably not fully there anyways and partial measures or compromises allow for varying degrees of each. For example, countries can adopt managed exchange rate regimes (like crawling pegs or currency bands) that offer stability without being full fixed. Also, capital flow management, such as forms of capital controls, capital inhibitors, or macroprudential regulations, permit partial openness without sacrificing all monetary policy autonomy. Amongst other things.
And more importantly, 2) in my view the biggest threat to King Dollar is the same biggest threat to the highly globally extractive planetary financial-economic system in general: a wave of sudden -- not necessarily violent -- true and real political change in the so called developing nations
Thank you for your kind words and comments!
1) The trilemma is a theoretical concept based on strict assumptions in economics. In practice, this gives some countries very little choice. China is working to reconcile the "impossible trinity." Your reply highlights the nuanced approaches possible in real-world scenarios.
2) Maybe there's also another threat to consider: technological revolution. Blockchain-based digital assets are here to stay.
Liu Yifan raises a very important question. How can China support de-dollarization while the currency of Hong Kong - China’s offshore financial hub and entrepot - is pegged to the US dollar? I live in Hong Kong and remember that in colonial times the city was described as “a borrowed place living on borrowed time.” After its return to the motherland in 1997 HK is no longer a borrowed place, but the sense of living on borrowed time hasn't completely disappeared, people are still anxious about the fate of its currency. We try to hedge the risk with dual currency deposits and savings, in yuan and HK dollars, but we fear that is not a long-term solution. As i applaude efforts to reduce the use of the US dollar in international trade, i wonder what the impact on the HK dollar is going to be. And i am not the only one. As to the rise of alternative payment systems to bypass Western sanctions, they are still unavailable to the general public. When I travel to Russia i can't use my Union Pay card because it is issued by a HK bank that abides by the sanctions. It's a negligible problem because i am not a big spender and cash is accepted everywhere i go, but it might be a deterrent for some people. Those who are doing business with Russia face bigger obstacles when it comes to making and receiving payments. However, these obstacles are not insurmountable, Russian-Hong Kong trade is steadily growing.
Hi Laura, thank you for sharing your insights and personal experiences - they add valuable perspective to the discussion.
This reminds me of 2022, when I was assigned to write a newspaper story reviewing the HK-US dollar peg amid growing concerns about the greenback’s dominance following Washington’s sanctions on Russian banks. At that time, the IMF, Goldman Sachs, and several experts were bearish on the US dollar outlook.
While reviewing data and reports, I found that public discussions about decoupling the HK dollar from the US dollar were more prevalent 10 years ago. (In 2012, the former Monetary Authority chief suggested that the HK dollar might need to be re-pegged to RMB or even allowed to float; In 2014, then Asia-Pacific chief of HSBC, also called for a review.) That’s probably because the Chinese RMB almost rose every day.
For Hong Kong, the US dollar peg isn’t ideal as the city's economic cycles are not aligned with those of the US. But currently, there’s no alternative. We residents and businesses feel the pains of it.
In my view, it’s still true that the dominance of the USD and any potential HKD unpeg won't change overnight - it could take decades. However, the use of other currencies like the RMB and cryptocurrencies is on the rise, and some kind of imagination is needed to realize the unpeg step-by-step. I’m sure the Chinese officials have all along been discussing the future of the HKD given the public debates over decades. Probably decentralized CBDC projects will be part of the plan.
Thank you, Yifan. I remember that discussion over ten years ago, when the risk-benefit analysis of unpegging the HKD was being conducted. Now the Greater Bay Area is more connected, regional integration has strengthened and yet the debate about our currency has apparently fizzled out. I agree with your assessment that it will take a long time to find a solution. Pegging the HKD was definitely easier than unpegging it. Meanwhile it causes a lot of distortions.
China must keep capital controls especially now as the money vultures are eagerly looking for any crack they can slip into. It's nice to consider that trading in national currencies could obviate the necessity of any kind of SWIFT-like system. After 75 years of operation, the world monetary/economic system will not be circumvented easily or quickly. New thinking is desperately needed to get outside the box. This will be the biggest shift of all.
The creation of alternative international messaging/settlement/payment systems is desirable only insofar as existing systems are open to manipulation and coercion by their existing users. For example were SWIFT utterly impervious to political pressure, and instead simply an incorruptible means of facilitating financial transactions, alternative means of settlement would be unnecessary.
However the reality is that SWIFT is being used as a financial bludgeon by Western nations to coerce other nations to act in accordance with their political wishes. This is a fatal flaw in any system of reliable financial transactions, which virtually by definition must be independent of political considerations. Therefore alternative systems will arise roughly in proportion to the degree that SWIFT is used in a political manner. And this is probably a healthy thing, as monopolies are generally negative in the economic sense.
Other financial payment systems will prosper in proportion to their freedom from political influence.
Thanks for this. The Kazan Declaration is very muted in its language, hinting at de-dollarisation but not as a direct challenge to the US. The main take away from the BRICS is its aspirations for Global South resource rich former colonies to pursue a path of financial self determination. I write about this on my substack.