Towards a China-centric International Monetary and Financial System?

An International Political
Economy Perspective

51º Encontro Nacional de Economia, Rio de Janeiro/RJ - Área 2 - Economia Política

André Moreira Cunha1, Luiza Peruffo2, Julimar da Silva Bichara3

Abstract: This article investigates the impacts of the digital revolution on the international monetary and
financial system (IMFS), emphasizing the effects engendered by China’s digital currency, the e-CNY. It
argues that from the point of view of emerging and developing countries the transformations of the digital era
imply considering the costs and benefits of implementing central bank digital currencies (CBDCs), in a context
where this “new form” does not substantially change the hierarchical and asymmetric character of the IMFS.
The e-CNY implies the establishment of new disjuncture, such as, for example, developing systems that are
interoperable with the Chinese system, or that are not. This aspect carries a strong political component in the
current context of questioning the status quo in various dimensions of the international system. To illustrate
this aspect, the article brings empirical evidence on the evolution of the interconnections between the Chinese
economy and the main EDCs considering the convergence of business cycles and financial cycles. Greater
integration with China could work as a potential attraction factor for many countries, which could gravitate
more towards the e-CNY, particularly in a scenario of greater opposition to the US dollar dominance.

Key words: International Monetary and Financial System; e-CNY; dollar; IPE; currency hierarchy

JEL: P45; B52; F55; F65.

Resumo: Este artigo investiga os impactos da revolução digital no sistema monetário e financeiro
internacional (IMFS), com ênfase nos efeitos gerados pelo lançamento da moeda digital da China, o e-CNY.
Argumenta-se que do ponto de vista de países emergentes e em desenvolvimento (EDCs) as transformações
da era digital implicam em considerar os custos e os benefícios de se implementar as próprias moedas digitais
de bancos centrais (CBDCs, na sigla em inglês), em um contexto no qual esta “nova forma” não altera
substancialmente o caráter hierárquico e assimétrico do IMFS. A criação do e-CNY gera novas disjuntivas,
como, por exemplo, a escolha entre desenvolver sistemas que sejam interoperáveis com o sistema chinês, ou
não. Este aspecto carrega um forte componente político na atual conjuntura de questionamento do status quo
em várias dimensões do sistema internacional. Para ilustrar este aspecto, o artigo traz evidências empíricas
sobre a evolução nas interconexões entre a economia chinesa e os principais EDCs na dimensão da
convergência entre os ciclos de negócios e os ciclos financeiros. A maior integração com a China pode
funcionar como um eventual fator de atração para os EDCs que, assim, poderiam gravitar mais em torno do
e-CNY, em um cenário de maior contestação da posição do dólar estadunidense.

Palavras-chave: Sistema Monetário e Financeiro Internacional; e-CNY; dólar; EPI; hierarquia de moedas

Introduction

The fundamental architecture of currency and payment systems has been heavily impacted by the
digital revolution, giving new contours to the debate on the future of the international monetary and financial
system (IMFS) (Carstens 2019; Auer et al. 2020; Prasad 2021; Eichengreen 2022). The launch of Bitcoin
paved the way for decentralized payments and relaunched discussions of private currencies (Houben and
Snyers 2020; Arner et al. 2020; FSB 2020). New technologies developed by fintechs and large companies in

1 Professor - Graduate Program in Economics at UFRGS (PPGE), and Research Fellow at CNPq. E-mail: [email protected]:
ORCID: https://orcid.org/0000-0002-3746-5974
2 Professor - Graduate Program in Economics at UFRGS (PPGE). E-mail: [email protected]. ORCID: https://orcid.org/0000-

0002-5744-4804
3 Professor at Madrid University (UAM, Spain). E-mail: [email protected]. ORCID: https://orcid.org/0000-0002-1403-0134

1
the Silicon Valley have made banking services more efficient and accessible, forcing the modernization of
traditional banking institutions and drawing the attention of public authorities regarding the role to be played
by private payment platforms (BIS 2019; Deutsche Bank Research 2020). In the wake of these developments,
new instruments such as instant payments and Central Bank Digital Currencies (CBDCs) have emerged to
counteract the moves led by the private sector (Boar et al. 2021; BCB 2023c).

This new technological reality brings to the fore the debate about the role that money plays in the
power relations of States with respect to private agents, as well as in relation to their peers in the international
system, raising speculations about the continued dominance of the dollar in the IMFS (Kuhenlenz 2023;
Norrlof 2023; Prasad, 2023). Hitherto, the relative decline of the United States (US) influence in spheres such
as income, international trade and security contrasts with the resilience of the inherited Bretton Woods system
centered on the US currency (Norrlof et al. 2020; Paulson 2020; Benney and Cohen 2022; Credit Suisse
Research Institute, 2023). The adoption of Bitcoin by some countries and projects of large corporations such
as Facebook to issue its own currency fueled a wave of predictions (in part, already frustrated) about the end
of the state monetary monopoly (Pistor 2021). More importantly, China's leadership in the development of its
digital currency, the e-CNY, has sparked a broader debate about the potential threat to the dollar-centric IMFS.

What is unique about the case of China's digital currency in the debate over the future of the IMFS is
that its launch is taking place in the context of rising geopolitical tensions between China and the US (Cheney
2019; Hemmings 2020; Bansal and Singh 2021; Knoerich 2021; Kumar and Rosenbach 2021; Greenwald
2021). Among the disputed aspects, the theme of global telecommunications infrastructure and digital
technologies is central, with implications for the security and defense sectors (see, for example, Economic
Diplomacy Initiative 2020; Nouwens 2021; Schmidt 2023; Wang 2023; Allen, 2023). According to the United
States-China Economic and Security Review Commission (USCC), being at the forefront of developing a
CBDC is one of the pillars of China's strategy to achieve technological self-sufficiency and may, in the long
run, undermine the status of the dollar and the effectiveness of US financial sanctions (USCC 2021, p. 166;
Prasad, 2023).

This paper looks at these ongoing developments from the perspective of emerging and developing
countries (EDCs). EDCs have advanced towards incorporating the ongoing digital revolution, albeit at
different paces. The CBDC Tracker and the Atlantic Council report that, as of May 2023, there are 114
countries with CBDC projects, equaling 95% of the global gross domestic product. EDCs such as South
Africa, Saudi Arabia, Brazil, Kazakhstan, China, Philippines, India, Indonesia, Iran, Malaysia, Russia,
Thailand, Singapore, to name a few, are in later stages of developing partial (pilot) or full deployment of their
instruments. Brazil, in particular, has a sophisticated payments system and has been actively following digital
transformations (Araújo 2022; BIS, 2022a). In November 2020, the Central Bank of Brazil (BCB) launched a
digital instant payment system, Pix, which already has more than 570 million individual keys (BCB 2023a).
The BCB is also part of the growing number of monetary authorities studying the possibilities for issuing a
CBDC and recently launched a pilot project for the digital real (BCB 2023b; 2023c).

Building on the theoretical traditions of international political economy (IPE) and post-Keynesianism,
particularly on the strands that study the IMFS hierarchy (Andrade and Prates 2013; De Paula et al. 2017,
Ocampo, 2018), this article assumes that EDCs’ projects to develop CBDCs will have to deal with decisions
regarding the technological and institutional options necessary to enable cross-border payments, which implies
creating interoperability with other central banks (Allen 2023; Prasad, 2023). In this context, it is necessary to
consider the technological dimension associated with the global geopolitical dispute. This means that the
option for certain standards and legal frameworks will also carry a political component. More than that,
attention should also be paid to the position that EDCs and their currencies occupy in the IMFS, as a general
rule, that is: as takers of the financial cycles originating in central economies, particularly the US, and,
therefore, of a position of greater financial instability (Rey 2015; Alami et al. 2021; Bonizzi et al. 2021;
Miranda-Agrippino and Rey 2021).

Following this introduction, the next section presents a discussion on currency and its forms of
representation, emphasizing the differences between state and private currencies. The following section
2
analyzes issues related to the absence of a monetary authority in the IMFS and the consequent competition
that exists between the various domestic currencies at the international level. The fourth section deals with the
specific elements of the creation of the e-CNY and how they relate to China's global power strategy. Empirical
evidence is provided on the evolution of the interconnections between the Chinese and US economies with
the main EDCs. Greater integration with China would be an eventual attraction factor for EDCs, which could
gravitate more towards e-CNY in a scenario of greater opposition to the position of the US dollar. With such
elements we intend to contribute to this debate. The final considerations summarize the article’s main results.

2. Going digital: Money and its forms of representation

The recent emergence of digital currencies and digital private assets has revived discussions about the
nature of money and its forms of representation (Carstens 2019; Bank of England 2020; Deutsche Bank
Research 2020; FSB 2020; Houben and Snyers 2020; BIS 2019, 2021; Prasad 2021; Eichengreen 2022). The
universe of digital currencies has proliferated rapidly, in which three categories can currently be discerned: (i)
cryptoassets (privately issued digital assets, such as Bitcoin); (ii) stablecoins (privately issued digital assets,
such as Tether, which are crypto assets that seek to maintain a fixed value in relation to a state currency, such
as the dollar); and (iii) digital currencies issued by central banks (currencies issued by national monetary
authorities in digital form).

A major appeal of digital currencies is the possibility of eliminating financial intermediaries (Carstens
2019; Arner et al. 2020; Auer et al. 2020; Boar et al. 2021). Digital currencies can be thought of as the
equivalent of a digital banknote (“token-based money”), as opposed to coins registered with a financial
institution (“account-based money”). Money registered at a financial institution is, by definition, based on the
existence of an intermediary, typically a bank that accepts deposits. Economic agents that have a bank account
can receive and send money to other agents that also have an account, by sending an order for the bank to
carry out the transaction. When the bank debits the payer's account and credits the payee's account, the
transaction is complete. “Account-based money” has been around in digital form for a while – anyone with a
bank account has digital currency nowadays. The digital recording of bank balance sheets means that payments
are quicker and easier to make than in the past. However, the basic operating architecture of payment
mechanisms has not changed, in the sense that transactions are carried out practically in the same way as when
they were physical: debiting the payer's account and crediting the payee's account.

The innovation brought by digital currencies is the advent of the digital token (Carstens 2019; Arner
et al. 2020; Auer et al. 2020; Boar et al. 2021). Currently, the most common forms of token are banknotes
issued by central banks around the world. While economic transactions using banknotes require the physical
meeting of counterparties, payments using digital tokens can be made remotely. In the case of cryptoassets
and stablecoins, the credit and debit entries that would normally be made by a bank are carried out from a
decentralized system, in which the users themselves validate each other's transactions. In the case of CBDCs,
transactions are validated by a central bank. In addition to excluding financial intermediaries, private digital
currencies, which inaugurated the digital currency universe, also aim to challenge the state's monopoly power
to issue currency (Deutsch Bank Research 2020; Bank of England 2020). In this sense, the interest of central
banks in developing digital currencies is also a response to financial innovations coming from private agents
and broader technological transformations under way in society (Carstens 2019; Bank of England 2020; IMF
2020; BIS 2019, 2021; FSB 2020; Houben and Snyers 2020).

The concept of currency is multifaceted and controversial (Shaikh 2016; Aglietta 2018; Skidelsky,
2018; Prasad 2021). Money has conventionally been defined as something that has the functions of a unit of
account, a medium of exchange, and a store of value. In economic theory, there are two main approaches to
the nature of money: the Metalists and the Chartalists (Goodhart, 1998; Bell 2001; Skidelsky, 2018). For the
Metalists, money is conceived as a technical instrument that facilitate transactions, that is, it does not affect
the economic process. This tradition perceives money as being neutral and associates it primarily with the
function of a medium of exchange, implying that what is used as money must have some intrinsic value,
3
regardless of its monetary function (Bell 2001, p. 152). The Anti-metalists, or Chartalists, disagree that money
derives its value from its content and offer a theory of money that is not based on market needs, emphasizing
the essential properties of money as a unit of account and store of value, and the role of the State as issuer.
For the Chartalist theory, “money is a creature of law,” as described by George Friedrich Knapp (1924, p. 1).
According to this perspective, money does not need to have any intrinsic value – such as dog teeth used in
Papua New Guinea, or beetle legs used in San Mathias (Shaikh 2016, p. 170) – but only the proclamation that
“it” will be accepted by the state for payment.

Defining the nature of money has several theoretical implications. For example, if we define money as
a neutral tool whose sole purpose is to facilitate economic transactions, there would be no logical reason for
money to be a state monopoly. In fact, enthusiasts of private money celebrate the possibility of taking away
from the State the monopoly of monetary issuance. However, private agents lack certain attributes that
characterize the State and that give moneys issued by them characteristics that private coins can never have
(Aglietta 2018; Carstens 2019). While private currencies may eventually fulfill the function of a medium of
exchange and contribute to lubricating the payment system within a given network, the absence of a territory
and coercive power by private agents clearly limits their ability to issue instruments that function as a full
currency. Private agents always operate under one (or more) public authority. The tax that private agents owe
cannot be paid in the currency they issue. There is no “sovereign” private entity where its private currency is
the legal tender. This is why private currencies fail to fulfill the function of a unit of account and why, even if
they can function as a store of value among private agents for some time, it is ultimately impossible for private
currencies to work as full currencies.

By recognizing the differences between currencies issued by private and public agents, it is also
possible to understand why there is an asymmetry in the use of national currencies at the international level
(Cohen 2015, 2019; Eichengreen et al. 2017). If private agents lack certain attributes that characterize the
State, it is also true that not every State can guarantee its monetary sovereignty. Keynes (1923) already argued
that it is the power of the State that provides stability in the intertemporal value of money, and not its
convertibility into a “barbaric relic” like gold. Similarly, Cohen (2015) argues that the “quality” of a currency
is based on the power of the issuing state: strong states have solid and widely desirable coins, while weak
states have formal issuing power but face partial or total rejection of their societies to accept the “sovereignty”
imposed monetary standard.

From this perspective, CBDCs are additional forms of expression of currencies issued by monetary
authorities, while “private digital currencies” do not have the characteristics of a currency (Carstens 2019). In
the case of cryptoassets or stablecoins, blockchain technology or the fact that payments are made in a
decentralized way does not change the intrinsic deficiencies of private “coins” (notably, the absence of
territory and coercive power). In the case of CBDCs, in principle, being digital does not change the content of
the currency – CBDCs are digital representations of local fiat currencies. However, as will be discussed in the
next section, the case of e-CNY seems to be particular, since the leadership in the development of a digital
currency could contribute to increasing China's structural power (Greenwald 2021; Hemmings 2020; Knoerich
2021; Kumar and Rosenbach 2021; Nouwens 2021; USCC 2021; Allen, 2023; Prasad, 2023). This would
mean a change in the currency's content and possibly could pose a more realistic threat to the dollar-centric
IMFS.

3. The IMFS as an arena of the global geopolitical dispute

Even though there are almost as many currencies as there are states in the world, only a few currencies
play an international role (Cohen 2015, 2019). In the absence of a “global state” with coercive power that
decides on monetary and financial standards, the monetary monopoly enjoyed by the state domestically is
replaced by competition between the various national currencies in the international sphere. The result of this
competition is ultimately explained by the preferences of public and private agents. What determines these
preferences and how they evolve over time is the subject of intense debate in the literature, that is, there is no
4
consensus on what defines the international appeal of a national currency (Norrlöf 2014; Cohen 2015,
Eichengreen et al. 2017). Objectively, more than half a century after the end of the Bretton Woods System
and the adoption of floating exchange rates, the dollar continues to lead in all domains: international loans
(54.6%), international debt issuance (65.3%), foreign exchange turnover (88.5%, out of a total of 200%, as
each transaction involves two currencies), official foreign exchange reserves (59.8%) and global payment
currency (45.4%), as shown in Table 1 (Gourinchas et al. 2019; Benney and Cohen 2022; Obstfeld and Zhou
2022; ECB 2022; Norrlöf 2023).

Table 1. Economic weight vs. International Role of Currencies, %

Economic weight International Role of Currencies

Global
Global FOREX Official Cross-Border Payments
GDP Loans3 Debt4
GDP1 Turnover5 Reserves6 SWIFT7
PPP2

US/USD 24.1 15.9 54.6 65.3 88.5 59.8 45.4

Eurozone/
15.5 7.4 25.8 21.7 30.5 19.6 33.3
EUR

Japan/JPY 5.7 4.0 3.7 1.9 16.7 5.2 4.3

China/CNY 17.7 18.8 n/a 0.6 7.0 2.7 1.3

Notes: 1IMF, World Economic Outlook April 2023. 2IMF, World Economic Outlook April 2023. 3Data refer to Q4 2021, ECB
(2022) Table A6. 4Data from Q4 2021, ECB (2022), Table A4. 5 Since two currencies are involved in each transaction, the sum of
the individual shares of each currency is 200%. Data from 2022, BIS (2022b). 6Data from Q3 2022, IMF, Currency Composition of
Official Foreign Exchange Reserves (COFER). 7Excluding payments within the euro zone. January 2023 data, RMB Tracker,
SWIFT (2023). Source: Prepared by the authors.

The usual starting point for analyzing the international potential of domestic currencies is the issuer's
power capabilities (Cohen 2015, 2019; Eichengreen et al. 2017). This “power as a resource” analysis considers
both economic and political aspects. Economic aspects generally include a country's economic size (usually
measured by GDP), trade size/share in international trade, capital market size (including stock market
capitalization and bond issuance), and creditworthiness. Political aspects are usually measured by military
capabilities (represented by defense spending, for example), although other aspects that are more difficult to
quantify, such as strong domestic institutions, are also considered in qualitative analyses.

From this perspective, the rise of the Chinese currency as an international currency should be
imminent, as (i) China is already the second largest economy in the world (and the largest when measured in
terms of purchasing power parity); (ii) China is the largest trading nation in the world, being the largest
exporter and the main trading partner of more than 100 countries (while the United States is the main partner
of 57 countries) (Rachman 2020); (iii) China is the largest official creditor in the world, surpassing the loans
granted by the World Bank, the IMF or the group of 22 member governments of the Paris Club (although the
United States remains the largest general gross creditor, considering public credits and private) (Horn et al.
2021); (iv) China's military capabilities, including missiles, satellite weapons, and a navy that has more ships
than the US navy, are strong enough to threaten the US (Rachman 2020); and (v) China is competing for
leadership in global telecommunications infrastructure and digital technologies, which includes being at the
forefront of developing a CBDC (Bansal and Singh 2021; Murray 2020, 2022; Schmidt 2023; Wang 2023).
For many analysts, one of the main obstacles to the internationalization of the yuan is China's capital control
policies, which limit the expansion of its financial market on a global scale (Frankel 2011; Prasad 2021; for
an alternative perspective see, for example, Eichengreen et al. 2022).

5
 While China's material capabilities are an undeniable source of pressure for a greater international role
of its currency, predictions about the future of the IMFS based solely on countries’ economic and political
endowments are, to say the least, incomplete (Norrlöf 2014). This is because the appeal of national currencies
is also shaped by “invisible” power elements, which are more difficult to measure. As noted by Norrlöf (2014,
p. 1045), “a shift in monetary capabilities from the United States to another actor is a necessary but insufficient
condition for the prevailing monetary hierarchy to change”. The persistence of the dollar's hegemony is not
only related to the United States' participation in global production and trade, its deep and liquid financial
markets, its position as “banker of the world” and its tentacles of internal and external power, but mainly to
the ability of the United States to translate these material capabilities into de facto power (Norrlof 2014; Cohen
2019).

From this perspective, while the material power of the United States provides the basis for the
international use of the dollar, its long hegemony can be explained by the existence of a series of political,
institutional and structural channels of formal and informal networks that encourage and reinforce the
dominance of the dollar since the end of World War II (Strange 1990, 1994; Norrlöf 2014, 2023; Eichengreen
et al. 2017; Cohen 2019). This “invisible”, “immaterial” and immeasurable face of monetary power is
sometimes referred to as “structural power”. One of the most popular definitions of “structural power” is
offered by Susan Strange (1994, p. 25), who defines it as “the power to decide how things should be done, the
power to shape the structures within which states relate to each other, relate to people or relate to companies”.
In the context of financial globalization, Strange (1990) suggests that power is shifting from a territorial state
base to a transnational corporation base, arguing that technology, states and markets increasingly interact to
determine structural changes. This also gives rise to a growing and mutual interdependence between states
and firms, which means that it is possible for states and private firms to increasingly share structural power
(Stopford et al. 1991). If the context of financial globalization has led to a diffusion of state power, reserving
the role of the most powerful actor for the United States, it seems reasonable to question whether this will
remain under a digital economy, especially with China establishing an advantage in terms of developing a
digital currency (Economic Diplomacy Initiative 2020; Bansal and Singh 2021; Greenwald 2021; Knoerich
2021; Kuehnlenz 2023).

The possibility of contesting the hierarchically superior position of the dollar in the IMFS has been
largely explored in the literature. Perez-Saiz et al. (2023), in a recent IMF study using data from the Swift
platform, reinforce the perception that there is significant inertia in the IMFS. However, they suggest that the
emergence of the digital revolution and geopolitical ruptures can accelerate transformations towards a
multipolar or more fragmented monetary standard. Using the same source of data, Perez-Saiz and Zhang
(2023) assessed the determinants of the international use of the Chinese currency for cross-border payments
in the period 2010-2021, that is, after the official authorization of the Chinese government to do so. For the
median of countries studied, such participation reached 20% in 2021, with the top quartile of the sample
registering 70%. In addition, IMF researchers found that there are important regional differences, which reflect
geographic proximity, trade links with China, legal aspects and the creation of financial facilities specifically
designed by the Chinese central bank to facilitate the internationalization of the RMB, such as bilateral swap
lines and offshore clearing banks. Such mechanisms ensured the provision of liquidity in the Chinese currency,
facilitating its use. In another dimension of this same dynamic, Arslanalp et al. (2023) identified an increase
of 5 p.p. in the use of monetary gold in the composition of international reserves since 2009. In the four
decades prior to the CFC, the opposite occurred, with a reduction in its relative importance. Arslanalp et al.
(2022) indicate that the process of diversification of international reserves has taken place by increasing the
use of monetary gold and the use of instruments denominated in non-traditional currencies. Here, the RMB
would have accounted for ¼ of the variations observed in the last two decades, a period in which dollar-
denominated assets increased from 70% to 60% of the official reserves of the monetary authorities. In this
light, the next section looks at the growing interconnections between China and EDCs, and how these could
help to increase the international use of China’s currency.

6
 4. China’s growing interconnections with EDCs: Evidence from Business and Financial Cycles

Since the e-CNY is the digital version of the fiat currency issued by the People's Bank of China
(PBoC), the Chinese CBDC in principle should face the same difficulties in terms of increasing its
international appeal as its non-digital format. This includes, for example, the still limited access of non-
residents to Chinese currency due to tight market liberalization and still high capital controls (Prasad 2021;
Eichengreen et al. 2022). Likewise, China's ability to increase its influence in international trade and trade
depends more on the development of its own alternative payment system (the Cross-Border Interbank
Payments System, CIPS) than on a digital currency (Fullerton and Morgan 2022, p. 18).

It is possible to imagine, however, that the development of a digital currency will help China to
promote the international use of its currency. China has an important economic asset: the growing
interconnection created in recent years with the main EDCs. This section provides a summary of the empirical
exercise on these growing interconnections, whose methodology is detailed in the Appendix. This exercise
includes all national economies that participate of the G20 and some other EDCs that have CBDC projects in
later stages of implementation and whose data to perform our estimates were available.

Boxes 1 and 2 show, respectively, two dimensions of integration between China and the US with the
selected economies: correlation in product cycles; and the weight that exports to the two largest economies in
the world have on the respective national products. It is observed that China has relatively increased more its
importance in the economic performance of its partners through international trade in comparison to the US.
Likewise, cyclical swings have narrowed. The tables and graphs in the Appendix allow to assess these
dimensions in detail.

Box1 – China Global Ties with Selected Countries: Trade Intensity and GDP Cycles

Correlation between the respective GDP cycles - variation between 1992-1994 and 2017-2019
variation between 1992-1994 and
Country exports to China in

Higher Lower
relation to its own GDP -

2018-2020

South Africa, Argentina, Saudi Arabia, Algeria, Bangladesh, Brazil,

Kazakhstan, Chile, Colombia, South Korea, UAE, Egypt, Iran, India,
Higher Indonesia, Malaysia, Mexico, Nigeria, Russia, Singapore, Thailand, Bahrain
Turkey , Germany, Canada, United States, France, Japan, Italy and United
Kingdom.

Lower Hong Kong

Source: Appendix.

7
 Box 2 – US Global Ties with Selected Countries: Trade Intensity and GDP Cycles

Correlation between the respective GDP cycles - variation between 1992-1994 and 2017-2019
variation between 1992-1994 and

Higher Lower
Country exports to th US in
relation to its own GDP -

South Africa, Argentina, Kazakhstan, South Korea, India, Mexico,

Higher Bahrain, Iran
Russia, Turkey, Germany, France, Japan, Italy and United Kingdom
2018-2020

Saudi Arabia, Algeria, Bangladesh, Brazil, Chile, China, Colombia, UAE,

Lower Egypt, Nigeria
Hong Kong, Indonesia, Malaysia, Singapore, Thailand and Canada.

Source: Appendix.

Box 3 summarizes the main results of our exercises regarding the correlation between the credit cycles
in the respective domestic markets (details in Appendix). In the case of the US, which are the ultimate
determinants of global financial cycles (Rey 2015; Miranda-Agrippino and Rey 2021), it is verified the
predominance of negative correlations, which possibly expresses their greater relative autonomy in
determining their domestic financial conditions. In the case of China, especially in the early 2020s, there is a
higher incidence of positive correlations. This suggests that this country is not able to counter the effects of
exogenously determined financial cycles, so that the cyclical oscillation patterns of domestic credit converge
with what is observed in most EDCs. Therefore, its status in the IMFS hierarchy remains lower than that of
the US, especially regarding the ability to exercise autonomy in the sense suggested by Cohen (2015 and
2019).

Box 3 – Credit Cycles: US and China versus Selected Countries

2001-2003 2020-2022
High: above 0,8 Moderate: from 0,5 to 0,8 Low: below 0,5 High: above 0,8 Moderate: from 0,5 to 0,8 Low: below 0,5
(in module) (in module) (in module) (in module) (in module) (in module)
South Africa, Algeria,
Argentina, China, Hong Kong,
Brazil, India, Mexico,
Positive Chile Singapore, Germany, Canada, Chile, China, India, Thailand
Russia Saudi Arabia Hong Kong, Türkiye
France, Italy, Japan and the
US United Kingdom.
South Africa, Algeria, Argentina,
Colombia, UAE, Indonesia,
Saudi Arabia, South Brazil, South Korea, Mexico,
Negative Colombia, Malaysia Malaysia, Singapore, Germany,
Korea, Indonesia UAE, Thailand, Türkiye Russia
Canada, France, Italy, Japan and
United Kingdom
Argentina, Brazil, Mexico,
South Africa, Chile, Singapore, Chile, Colombia,
UAE, Thailand, Türkiye, South Africa, Saudi Arabia, Singapore, Turkey, Germany,
Positive South Korea, Thailand, Turkey, Germany, South Korea, UAE,
India India, Malaysia Canada, USA, France, Italy and
Indonesia Canada, USA, Japan and UK. Hong Kong,
Japan.
China Indonesia
Saudi Arabia, Argentina,
Negative Hong Kong Brazil, Malaysia, Russia, Russia, Thailand, United
Colombia, Mexico
France and Italy. Kingdom.

Source: Appendix.

Even though our exercise does not establish causality relationships, the results allow us to suggest that
there are spaces to deepen the international use of the yuan when considering the aspects associated with the
relative weight of international trade generated by China in the income of its partners and the greater
correlation of its income and credit cycles with these same partners. Add to this the fact that China is at the
technological frontier in introducing radical innovations derived from the digital revolution (Allen 2023;
Schmidt 2023; Wang 2023). Once it masters even more digital currency technology, China could help other
economies to develop their own CBDCs, which would most likely be interoperable with e-CNY. China could
also decide to provide foreign aid using e-CNY or insist on its use for projects such as the Belt and Road
8
Initiative (BRI) (Fullerton and Morgan 2022, p. 18). However, these additional policies have not yet been
announced.

Officially, the Chinese government's argument for developing a digital currency is mainly focused on
the domestic market. A first set of reasons is shared by most Central Banks that study the possibility of
developing digital currencies, namely, to reduce costs associated with paper money, improve the effectiveness
of monetary policy, increase the speed and reduce the cost of international payments and fight criminal
activities. Another PBoC concern is that two companies, TenPay (WeChat) and AliPay (Ant Financial),
account for 93% of mobile payments. Finally, Facebook's announcement in June 2019 about its intention to
launch a digital currency, Libra, which would not include the yuan among its reserve currencies, was also a
reason for the PBoC to accelerate the e-CNY project (Murray 2020; Deutsche Bank Research 2020).

The Chinese government has expanded its efforts in implementing the infrastructure for instant
payments and a series of advances in the digital area. Such developments, which are necessary for the
successful operationalization of the e-CNY, also establish China's presence beyond its borders. Advances in
digital infrastructure have been made mainly within the scope of the Digital Silk-Road (DSR). DSR initially
emerged as an arm of the Belt and Road Initiative (BRI), aiming at strengthening cooperation in areas such as
the digital economy, artificial intelligence, nanotechnology and quantum computing, and also to advance the
development of big data, cloud computing and smart cities. Since 2015, the digital area has gained the attention
of the Chinese government at the highest level, emerging as a parallel initiative that adds to China's strategy
to become a global technological superpower (which includes, for example, “Made in China 2025 Strategy”,
“IA National Development Plan”, “China Standards 2035”, among other policies) (Nouwens 2021, p. 7). As
described in Cheney (2019), DSR comprises four interrelated initiatives: (i) an external hub of investment in
digital infrastructure, including next-generation cellular networks, fiber optic cables and data centers; (ii) a
domestic hub for developing advanced technologies that are essential to economic and military power,
including satellite navigation systems, artificial intelligence, and quantum computing; (iii) an axis of economic
interdependence and network externalities, which includes the promotion of e-commerce through digital free
zones; and (iv) an axis of diplomacy and digital governance, including multilateral institutions, which aims to
shape the international digital environment to China's preferences.

There are several synergies between the DSR and the international promotion of the e-CNY. China's
domestic and foreign investment in building the backbone of the communications infrastructure is an
opportunity to encourage the use of digital currency for all transactions in the DSR and, more importantly, a
way to increase Chinese government oversight of financial activity worldwide, gaining access to large datasets
from the countries receiving their resources (Hemmings 2020). Likewise, the promotion of e-commerce
through digital free trade zones, established to reduce the costs associated with international shipments and
cross-border trade, is helping Chinese companies to penetrate new markets, especially in the South and
Southeast of Asia (Cheney 2019, p. 8-9). Finally, there is an opportunity for China to capitalize on its
advantage in developing a CBDC and shape the digital environment in a way that favors the promotion of the
e-RMB. As Hemmings (2020) explains, China is developing its own “sticky power” (a concept which can be
associated with the idea of structural power) in two phases: first, using investments and DSR funding to
promote and export Chinese enterprises, products and technology standards, as well as the China-centric
development model, governance model and trade and financial system; and, second, using the BRI network
to win the broader technology war against the United States.

Chinese investment in information and communication technologies through the DSR is most likely
an element that can contribute to the international use of e-CNY, and it is a novelty compared to previous
dollar rivals. As geopolitical competition has been centered on the technological domain (Allen 2023; Schmidt
2023; Wang 2023), countries in China's zone of influence will potentially have the benefit of accessing
Chinese technology and receiving their investments linked to the use of Chinese currency (digital or not). It
should be noted, therefore, that the development of China's digital currency is part of a broader strategy to
shape the global environment of digital technologies, increasing its economic and political influence around
the globe.

9
 It should also be noted that, despite the potential of these initiatives, China is seeking to penetrate an
area that the United States and its allies have dominated since the beginning of the telegraph – and which own
42 of the 50 largest telecommunications and technology companies, against eight from China (Nouwens 2021,
p. 9). Thus, although the Chinese offensive may lead to a broad global geopolitical reconfiguration, including
in the monetary and financial spheres, the path until this (eventually) unfolds must be permeated by conflicts
and tensions with the incumbent power. While the United States maintains its hegemonic position in
international finance, China advances in its integration with a significant part of national economies.

5. Final Remarks

This article investigated the impacts of the digital revolution on the IMFS, especially regarding the
ramifications of the launch of e-CNY for the EDCs. IPE and Keynesian analyses, as well as the empirical
evidence developed in this article, allow us to suggest that EDCs, in addition to being cycle takers – business
and financial –, in the terms suggested by Ocampo (2001, 2018) – that they are also “takers” of the global
geopolitical dispute between the United States and China. This means that decisions related to the integration
of new monetary and financial technologies must consider both their respective subordinate positions in the
currency hierarchy, as well as Sino-US tensions.

From the perspective of EDCs, future studies on this topic should take into account at least two levels
of analysis: (i) considerations on the costs and benefits of issuing a CBDC, as has been done by various
monetary authorities around the world, leading to taking into account the specificities of each economy; and
(ii) considerations on the impacts of the adoption of CBDCs by foreign central banks and the issuance of
private currencies (issued by domestic or foreign entities), in view of the subordinate position that EDCs
occupy in the IMFS. There is also the perspective that the new technological conditions will produce
incentives for the emergence of new arrangements, such as regional state digital currency, of groups of
countries that do not necessarily belong to any regional or even global bloc. Examples in this sense are the
discussions around the creation of common currencies in Mercosur/South America and in the BRICS.

The recurrent announcement of the dollar's decline seems to have more to do with scenarios of what
may happen in the still uncertain future, than with evidence of a consistent process of de-dollarization. There
is, in fact, a movement towards the diversification of reserve assets on the part of the monetary authorities and
the expansion in the use of emerging currencies, such as the renminbi, in international payments. Such
processes may gain additional momentum with the inclusion of more countries in the BRICS, the expansion
of the scope of partnerships between the emerging powers and other countries of the so-called Global South,
and the ongoing technological and institutional innovations, such as the e-CNY, the Cross-Border Interbank
Payment System (CIPS), multilateral banks that are outside Western control such as the New Development
Bank, to name a few. Fundamentally, the future of the IMFS is directly linked to the unfolding of disputes for
global power, in which the reaction of the US and its allies cannot be overlooked a priori. In this perspective,
the horizon remains open.

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15
 Appendix: Methodology and Evidence

The empirical literature on economic integration (Capanelli et al., 2009; Huh and Park, 2017) uses
indicators of trade intensity and complementarity, convergence in economic cycles, convergence of financial
prices, movement of capital and people. In line with the original insights of Robert Mundel, McKinnon, Abba
Lerner and Peter Kenen, it is assumed that the construction of monetary-exchange rate arrangements between
different economies tends to be more successful, the more integrated they are and the more convergent are
their economic cycles (Baldwin and Wyplosz, 2004; Imbs, 2004; Huo et al. 2017; Soyres and Gaillard, 2019).

In the exercises reported here, two strategies were used: estimating the correlation between
income/business cycles and credit cycles; and the calculation of the degree of exposure of the countries under
analysis to bilateral trade with China and the United States. Previous studies suggest that economic cycles
have become more correlated largely because of the linkages established through the reorganization of global
production chains and thus the increase in export/import intensity.

To estimate the synchronicity of the cycles, Corr(v, s)ijt was used. This denotes correlation of business
(GDP) and financial (private sector credit) cycles between country i and j, during time t for a proxy of
economic (or financial – credit) activity v, which in our case corresponds to real GDP /Credit calculated by
Hodrick-Prescott (HP) or Christiano-Fitzgerald (CF) filters. To calculate the business cycle correlation of our
sample of 29 countries, which includes all of the G-20 countries and ten EDCs from different regions (Africa,
Asia and Latin America), the original series were initially log-transformed Natural. Using the HP and CF
filters, we calculate the business cycle and estimate the correlation coefficients for pairs of countries, in periods
of 10 or 15 years, estimated successively (1951-1960; 1952-1961... 2010...2019; or 1951–1964; 1952–1965;
…; 2006–2019), totaling a database with 64/59 periods. The original GDP source was the Conference Board
(2023), with annual nominal GDP data in international dollars at purchasing power parity. For credit to the
private sector, the BIS quarterly data series between 2000 and 2022 (2023) in nominal dollars were used. In
this second case, the correlation was with moving windows of 10 and 15 quarters.

Here we report estimates based on the HP filter and 10-year/10-quarter rolling windows. The results
with the CF filter and/or with enlarged windows were convergent. Complete results can be made available
upon request. Finally, to verify the degree of trade integration, we chose to calculate the Mijt/GDPjt ratio,
where the numerator is the import of goods from country i (China or the USA) in year t and the denominator
is the GDP of country j in period t, always with data from the World Bank (2023).

Tables 1 and 2 of this Appendix show the temporal evolution of the product correlation and trade
integration indicators in two moments, always with averages: 1992-1994 and 2017-2019 (product)/2018-2020
(trade intensity), which correspond to the starting and ending points of the series made available by the source
in a uniform way. The combination of these two dimensions was reported in the text.

16
 1. Economic Integration Indicators – China and Selected Countries

GDP Cycles Credit Cyles Exports to China (%

Correlations Correlations countries' GDP)

1992-1994 2017-2019 2001-2003 2020-2022 1992-1994 2017-2019

Algeria 0.15 0.61 n.d. n.d. 0.0% 0.7%
Argentina 0.23 0.81 -0.22 0.51 0.1% 1.4%
Bahrain 0.51 0.03 n.d. n.d. 0.1% 0.4%
Bangladesh -0.59 0.32 n.d. n.d. 0,0% 0.3%
Brazil 0.02 0.57 -0.04 0.2 0.2% 4.7%
Chile 0.40 0.68 0.22 0.81 0.6% 10.1%
Colombia 0.05 0.69 -0.63 0.88 0,0% 1.8%
Egypt -0.16 -0.11 n.d. n.d. 0,0% 0.4%
Hong Kong 0.46 0.92 -0.75 0.88 11.8% 2.3%
India -0.17 0.86 0.67 0.7 0.1% 0.7%
Indonesia -0.52 0.5 1.00 0.67 1,0% 3.3%
Kazakhstan -0.15 0.64 n.d. n.d. 0.9% 5.1%
Malaysia 0,00 0.71 -0.01 0.57 1.7% 19.9%
Mexico 0.28 0.74 -0.53 0.31 0,0% 1.3%
Nigeria -0.22 0.28 n.d. n.d. 0,0% 0.5%
Russia -0.61 0.41 0.31 -0.08 0.9% 3.7%
Saudi Arabia -0.13 0.52 -0.01 0.71 0.1% 6.0%
Ssingapore 0.13 0.87 0.2 0.47 3.4% 9.2%
South Africa 0.21 0.67 0.47 0.76 0.2% 6.5%
South Korea -0.13 0.79 0.87 0.88 1.2% 111.0%
thailand 0,00 0.34 0.65 -0.12 0.5% 9.0%
Türkiye -0.11 0.79 0.04 0.29 0.2% 0.5%
United Arab Emirates 0.02 0.45 0.52 0.99 0.1% 4.1%
Will -0.47 0.34 n.d. n.d. 0.4% 4.6%
Memo: G7 Countries
Canada 0.12 0.92 0.15 0.04 0.3% 1.5%
France 0.01 0.83 -0.01 0.03 0.1% 1.2%
Germany 0.34 0.81 0,00 0.02 0.3% 2.7%
Italy 0.51 0.72 -0.05 0.03 0.2% 1.1%
Japan -0.14 0.71 0.01 0,00 0.5% 3.5%
UK 0.46 0.8 0.04 -0.02 0.1% 0.8%
USA 0.21 0.68 0.07 0.37 0.2% 0.7%

Sources: authors’ elaboration based on The Conference Board (2023), BIS (2023), World Bank (2023).

2. Economic Integration Indicators – China and Selected Countries

GDP Cycles Credit Cyles Exports to US (% countries'
Correlations Correlations GDP)
1992-1994 2017-2019 2001-2003 2020-2022 1992-1994 2017-2019
Algeria 0,51 0,65 0,32 -0,35 3.6% 1.5%
Argentina -0,21 0,76 0,32 -0,35 0.6% 1.1%
Bahrain 0,45 0,23 n.d. n.d. 2.2% 2.5%
Bangladesh 0,35 0,39 n.d. n.d. 3.0% 1.9%
Brazil -0,14 0,67 0,58 -0,74 2.1% 1.1%
Chile 0,52 0,82 0,92 0,25 3.5% 2.8%
China 0,21 0,68 0,07 0,37 7.1% 2.4%
Colombia 0,08 0,49 -0,27 -0,03 4.8% 4.3%
Egypt 0,65 0,18 n.d. n.d. 1.2% 0.9%
Hong Kong -0,03 0,78 0,46 0,63 8.5% 1.8%
India 0,56 0,71 0,60 0,14 1.6% 2.1%
Indonesia 0,08 0,47 -0,98 -0,18 3.8% 2.0%
Iran 0,00 -0,21 n.d. n.d. 0.0% 0.0%
Kazakhstan 0,35 0,68 n.d. n.d. 0.2% 0.7%
Malaysia 0,44 0,92 -0,40 -0,28 16.7% 12.0%
Mexico 0,32 0,95 0,61 -0,65 9.2% 29.1%
Nigeria 0,27 0,21 n.d. n.d. 15.1% 0.9%
Russia -0,31 0,75 0,62 -0,78 0.5% 1.3%
Saudi Arabia -0,24 0,60 -0,95 0,83 6.9% 2.0%
Singapore 0,35 0,82 0,04 -0,46 21.7% 7.8%
South Africa 0,36 0,84 0,23 -0,20 1.4% 2.5%
South Korea -0,34 0,71 -0,15 0,57 4.6% 4.7%
thailand 0,40 0,72 -0,58 0,12 7.1% 6.0%
Türkiye 0,04 0,66 -0,76 0,70 0.9% 1.5%
United Arab Emirates 0,45 0,61 -0,56 0,29 1.3% 1.1%
Memo - G7
Canada 0,41 0,75 0,01 -0,15 19,9% 5,6%
France 0,69 0,82 0,02 -0,12 1,2% 1,9%
Germany 0,08 0,78 0,04 -0,09 1,4% 3,2%
Italy 0,72 0,78 0,02 -0,18 1,2% 2,8%
Japan 0,21 0,90 0,05 -0,02 2,5% 2,7%
UK 0,33 0,89 0,09 -0,16 2,0% 2,1%

Sources: authors’ elaboration based on The Conference Board (2023), BIS (2023), World Bank (2023).

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3. Business Cycles – GDP Correlations, 1960-2019

Source: authors’ elaboration based on The Conference Board (2023).

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4. Financial Cycles – Domestic Credit to the Private Sector Correlations, 2000-2022

Source: authors’ elaboration based on BIS (2023).

19