The USD System at the Center of China’s Global Engine
Posted on | August 12, 2026 | No Comments
Citation APA (7th Edition)
Pennings, A.J. (2026, Aug 12) The USD System at the Center of China’s Global Engine. apennings.com https://apennings.com/dystopian-economies/the-usd-system-at-the-center-of-chinas-global-engine/
Introduction
China’s economic rise is usually explained through Deng Xiaoping’s reforms Special Economic Zones (SEZ), state-owned enterprises (SOEs), infrastructure investment, and the mobilization of a vast industrial workforce.[1] But these domestic achievements operated within a global financial infrastructure dominated by the US dollar and Eurodollar system, the combination called the “USD.”
Most-Favored-Nation (MFN) treatment beginning in 1980 and World Trade Organization (WTO) accession in 2001 connected China’s expanding manufacturing capacity to global markets, while dollar-denominated trade finance, foreign exchange, banking, and payment networks made international commerce relatively inexpensive and predictable. China’s “exorbitant privilege” was therefore not the ability to issue the world’s reserve currency, but the ability to use the world’s reserve currency and its infrastructure while concentrating domestic resources on production.
China’s export success generated enormous dollar inflows, which were accumulated as foreign-exchange reserves and invested substantially in US Treasuries and other dollar assets. This created a reinforcing feedback loop. China manufactured goods, global customers paid in dollars, China accumulated dollars, and those dollars were recycled into highly liquid Treasury securities.
The United States benefited from foreign demand for its debt and continued dollar centrality, while China benefited from access to the world’s largest consumer markets, deep trade-finance networks, and a highly liquid reserve asset. The relationship was therefore mutually dependent rather than simply a one-sided exercise of American monetary power.
The strategic question today is what China would lose if global dollar liquidity became substantially less available. China could continue trading through the renminbi, CIPS, bilateral currency arrangements, and other alternatives, but replacing the dollar requires replacing an enormous coordination infrastructure, not merely introducing another currency. The accumulated network of dollar contracts, financial markets, trade finance, reserves, payment systems, and liquidity is difficult to reproduce.
If the dollar system’s liquidity, accessibility, or neutrality erodes for China through sanctions risk, fragmentation, deliberate decoupling, or a genuine multipolar shift, the costs would be significant. Trade settlement becomes slower, more expensive, and less reliable outside established dollar rails. Trade finance shrinks or becomes costlier. Currency management grows harder without deep dollar markets to intervene in. Reserve management loses its primary liquid safe asset. Export competitiveness and the ability to run large surpluses without friction would suffer.
Parallel systems (CIPS, bilateral swaps, RMB settlement experiments, Belt and Road financing) exist and are expanding. Yet, they remain far smaller, less liquid, and less universally accepted than the dollar/Eurodollar complex. Full convertibility and open capital accounts, necessary for the yuan to rival the dollar, would require reforms that clash with China’s preference for capital controls and financial stability.
China’s success was never purely internal. SEZs, SOEs, and the drive to create and distribute wealth matter deeply. But they operated inside a dollar-centered global financial architecture that China was admitted into via MFN and WTO. Accumulating Treasuries was both a consequence and a stabilizer of that integration. The privilege has been mutual, if asymmetric.
Losing ready access to that liquidity would not erase China’s manufacturing base or domestic scale, but it would raise the friction, cost, and risk of remaining the world’s preeminent trader, precisely the role the dollar system helped it claim.
Like the fast follower economic successes of Japan and South Korea, the deeper lesson is that China’s rise depended not only on its ability to manufacture goods for sale, but on its ability to connect that production to the spreadsheet logic of global accounting and its networked financial infrastructure. In this sense, China’s greatest industrial transformation occurred inside the USD system it is now seeking greater independence from.
Notes
[1] I began to meet Chinese journalists and communication specialists in 1983 while I was an intern at the East-West Center’s Communications Institute in Hawaii. We took some joy in exposing them to the West’s offerings. I remember going to see Risky Business in a movie theater, club dancing, and a Stevie Wonder concert.
AI Prompt(s) What the USD China’s Exorbitant Privilege? Write a blog post answering that question. Address how China’s economy sought to “distribute wealth, not poverty.” It created Special Economic Zones (SEZs) and State-owned Enterprises (SOEs) but what really drove China’s success was the global US dollar and Eurodollar infrastructure that allowed for trade anywhere easily, fast, and with minimal transacting fees. China was granted Most Favored Nation (MFN) since 1980 and came into its full power when accepted into the World Trade Organization (WTO) in the early 2000s, reducing tariffs on all electrical equipment, from computers to telecommunications equipment. What advantages did collecting US treasuries give China? What did it offer the US for its global currency? Finally, what will it lose without the global liquidity of the USD?
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Not to be considered financial advice. AI is often used, and results are thoroughly interrogated. Links are used for some citations.
Anthony J. Pennings, PhD is a Professor at the Department of Technology and Society, State University of New York, Korea and a Research Professor for Stony Brook University. He teaches AI and broadband policy. From 2002-2012 he taught digital economics and information systems management at New York University. He also taught in the Digital Media MBA at St. Edwards University in Austin, Texas, where he lives when not in Korea.
Tags: Chinese RMB > Deng Xiaoping > Most Favored Nation (MFN) > state-owned enterprises (SOEs) > USD liquidity > World Trade Organization (WTO)
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Professor (full) at State University of New York (SUNY) Korea since 2016. Research Professor for Stony Brook University. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and global political economy
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