According to Oxford Economics, dollar invoicing provides liquidity and stability to emerging markets, while greater access to Chinese capital and less dependence on the dollar, the dollar According to Oxford Economics, dollar invoicing provides emerging markets with liquidity and stability, while greater access to Chinese capital and less dependence on the dollar limit capital flight during periods of strong dollar growth. Diversifying currency risk helps emerging markets improve their financial position and reduce borrowing costs when the dollar strengthens.
Highlights
<p>World's confidence in dollar is declining: Report</p>
Signs of weakness in the US economy
China's growing economic influence
Prime Team, New Delhi.
The global economic structure is changing. The decline of America's dominance, coupled with the rise of China on the global economic stage, is creating the foundation for a global economy with two power centers. New research from Oxford Economics analyzes this topic. It states that this change is reshaping global alliances, capital flows, and geopolitical narratives. This will have far-reaching consequences for all major countries and markets.
For a long time after World War II, America's economic influence remained unchallenged. Its dollar became the currency of global trade, and its government bonds became the world's safest reserves. But the authors of the Oxford Economics report, "Shifting Economic Gravity in a Global Rebalance," believe that confidence is now eroding. Fiscal complacency, political gridlock, and rising debt pose warnings for every aspect of the American financial system.
Doubts over the autonomy of the Federal Reserve
US government debt has surpassed 180% of gross domestic product (GDP). Reports warn that this figure undermines investor confidence. Economists consider this a fiscal tipping point. Political interference within the US Federal Reserve and delays in economic reforms are weakening the country's institutional foundation. The Fed's autonomy is being questioned as it is forced to keep interest rates below what is needed to control inflation.
Benjamin Travis, senior economist at Oxford Economics and one of the report's authors, says, "We have attempted to understand a world economy that is emerging from an era of undisputed dollar dominance. While the US remains a strong global power, persistent fiscal and policy challenges create room for alternative poles to emerge." Oxford predicts a 20% decline in the dollar's value against global benchmarks by 2060.
According to Travis, repeated political interference has led the Federal Reserve to hold interest rates below our baseline forecast, weakening its institutional credibility. This erosion of central bank independence is a major factor in weakening investor confidence in US assets.
Lower demand for US assets impacts the stock market, pushing up Treasury yields and triggering a negative cycle. This could reduce capital flows into the US, making it more difficult to cover the deficit. A weak currency and higher import costs put pressure on both consumers and businesses. The "dollar premium," which once provided unlimited borrowing power, is gradually eroding.
This fact was also revealed in other studies
These trends are also reflected in global surveys. Perceptions of the United States are declining among both allies and adversaries. According to the Pew Research Center and Consilio International, "favorability" toward the United States after 2024 has declined sharply even among close allies. On the other hand, China's ratings are rising, especially in the Global South. This shift in soft power increases America's economic risk, as shared values become less effective in strengthening coalitions.
According to Marco Santaniello, economist at Oxford Economics and another author of the report, "Lowering investor confidence and rising government debt reverse capital flows, increasing risk premiums and weakening the dollar. In this scenario, the compound annual growth rate of US domestic output could fall to 1.5% by 2060."
According to Santaniello, "On the other hand, rising consumer spending and the renminbi's increasing credibility in trade and reserves are moving China toward a consumption-driven growth model. China's economic reforms have the potential to fundamentally alter global capital flows and trade dynamics. A more balanced and diversified financial system will present both opportunities and challenges, especially for emerging countries integrated into China's ecosystem."
China is building a new global system
At a time when the US is sagging economically, China is steadily progressing. Oxford Economics writes about the changes in the world's second-largest economy: sweeping reforms are loosening capital controls, the renminbi is becoming a competitive reserve currency, and international investor interest in China's bond and stock markets is growing.
According to a report by a US bank, China is implementing comprehensive social security reforms and strengthening its pension system. This is helping families save less and spend more. Household savings, relative to income, currently hover around 25% and is projected to decline to just 10% by 2060. This will boost household consumption and propel China toward a modern, advanced economy.
China is also accelerating the privatization of state-owned enterprises in non-strategic sectors. This is increasing efficiency and productivity and fostering new innovations. However, government control over strategic sectors remains intact. Its emphasis on technologies such as semiconductors, advanced manufacturing, artificial intelligence (AI), and green energy signals a preparedness for the competition that will underpin the next phase of global economic competition. Oxford estimates that the Shanghai Stock Price Index will be approximately 50% above baseline projections by 2060.
Asia-Africa countries benefit from proximity to China
According to the report, Asian and emerging economies most closely connected to China's supply chains and technology networks are also benefiting. Countries in Southeast Asia, the Pacific, and Central Asia are rapidly aligning with China. Countries like Vietnam, Indonesia, and Malaysia have promoted trade integration with China through regional partnerships and supply chain restructuring. These countries have attracted more Chinese capital and gained access to new markets. They have also benefited from currency diversification, which protects them from dollar fluctuations.
The growing importance of the Chinese currency, the Renminbi, as a trade and reserve currency for much of Africa and the Global South opens up new opportunities. China's Belt and Road Initiative, technology investments, and industrial partnerships have strengthened economic ties with Ethiopia, Kenya, Nigeria, and the Gulf Cooperation Council (GCC) countries. These countries are benefiting from reduced dollar dependence and greater export demand. According to Oxford Economics, countries in Latin America and Eastern Europe that have the ability to hedge against the Renminbi, the Euro, and the Dollar have unprecedented financial flexibility.
However, according to the report, the Donald Trump administration's protectionist policies and tariffs have renewed trade tensions, particularly in sectors like electronics and auto. Asian exporters and multinational companies are now forced to strike a balance. This is fueling "border-shoring" on the one hand and disrupting supply chains on the other. The situation becomes difficult for other countries attempting to appear neutral when access to US or Chinese markets is politicized and weaponized.
Europe between Washington and Beijing
Europe is at a crossroads. As the US becomes isolated and the dollar weakens, euro assets are becoming attractive. The region's large manufacturing base and investments in green and advanced industries enable it to act as a vital bridge between the US and China. Debates among European countries on technology transfer, security, and standards are now taking shape amid the competing visions of Washington and Beijing.
According to the World Economic Forum (WEF), Europe's manufacturing sector has benefited from demand for luxury goods, electric vehicles, and industrial automation equipment from China's growing consumer class. However, if China and the United States force countries to choose sides on issues of digital governance, standard-setting, and climate change technology, EU policymakers will face increasing difficulties.
The era of Washington's economic rules is over.
Oxford Economics envisions a future global order that will be fragmented but diversified. The era of universal economic rules dictated by Washington is over; it is being replaced by a system where regional powers and alliances will set their own standards for trade, technology, security, and capital flows.
Countries no longer have to rely solely on the US system to cushion them from economic shocks. Instead, access to Chinese markets and capital, the emergence of the euro as a quasi-reserve, and innovative regional solutions create resilience, from cross-border payment systems in Southeast Asia to African trading blocs.
Emerging markets can particularly benefit from this. They can diversify their reserves, avoid sudden debt crises triggered by dollar fluctuations, and negotiate financing from larger partners. This is clearly evident in Argentina, which expanded its use of the renminbi for imports in 2023. Such hedging strategies have yielded positive results.
Next-gen technology will determine dominance
Technology will be a key feature of the new multipolar era. China's pursuit of self-reliance in AI, semiconductors, quantum computing, and green energy has become a key pillar of its industrial policy. The US, on the other hand, is countering this with industrial subsidies, restrictions on Chinese technology, and efforts to relocate critical manufacturing to its homeland or to a friendly country.
Innovation is becoming increasingly important in this race. Whichever group wins next-gen technology will likely dominate key sectors, from advanced manufacturing to clean energy and digital finance, for decades. This battle for dominance is intense, with both sides deploying significant government resources and regulatory mechanisms to set standards, intellectual property rules, and guide global research and development spending.
International narrative changing with soft power
This is a battle not just for economic power but also for international narrative. As the Oxford report and other expert comments make clear, China's rise has been strengthened by its ability to present a coherent, long-term vision and implement sweeping reforms across industry and society. In contrast, the US is increasingly perceived as reactive, bound by short political cycles, and increasingly plagued by internal divisions. This is eroding its image of global leadership over decades, which the Chinese Communist Party has built upon as its strength.
This global rebalancing is being felt not only by countries and investors, but also by millions of workers and companies. For American workers, the breakdown of global dominance has led to increasing pressure on international competition and wage and job security. American industries, vulnerable to import competition and automation, will need to adapt to a situation in which America's influence on global value chains will diminish. On the other hand, liberalization, increased consumption, and innovation are bringing new opportunities for Chinese workers and entrepreneurs. China is now adopting a model that relies more on productivity and global competitiveness.
Many developing countries stand at a crossroads between opportunity and risk. Those that integrate quickly into China's ecosystem could flourish. Countries unable or unwilling to break away from traditional partners may face higher borrowing costs, stagnant exports, and greater vulnerability to global shocks.
According to the Oxford report, this rebalancing cannot be considered final. The United States, which is in transition, will remain a strong economic and technological power for decades to come, even as internal divisions take their toll. China's rise is rapid, but it also faces its own set of weaknesses, ranging from a disproportionate weighting of real estate to demographic headwinds and challenges in regulatory reform.
Yet one conclusion is clear: the era of the single dominant superpower is coming to an end. The new emerging order will require new thinking. For countries, investors, and ordinary citizens, adaptability, flexibility, and openness to new alliances will be key to navigating this new world. The Oxford Economics report leaves no doubt that the future belongs to those who can navigate this multipolar system.
