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An financial decoupling of the USA and China is "far-off," says the previous head of the IMF China

China's President Xi Jinping and US President Donald Trump during a meeting outside the Great Hall of the People in Beijing.

Artyom Ivanov | TASS | Getty Images

Economic decoupling of the US and China is "far away," but the move away from a US-centered system undoubtedly appeals to Beijing, said Eswar Prasad, previously head of the International Monetary Fund's China division.

"These two economies are still pretty closely related. After all, it is very difficult for the two largest economies to stop colliding in different dimensions," said Prasad, who is now a professor of trade at Cornell University.

"The desire to escape from the US-based or US dollar-based international financial system is certainly a priority for China," said Prasad.

Because of this, the world's second largest economy is pushing for greater use of the Chinese yuan in trade, he said.

China is also actively opening its capital markets to foreign investors and liberalizing its exchange rate regime.

"This will be tied to the development of the domestic capital market, which Chinese leaders know will be vital to China's continued growth going forward," said Prasad.

Balanced relations with the USA and China

As tensions mount, the "great power dynamics" between the US and China will certainly become more interesting, Prasad said.

While China used to appear to have the upper hand in the pandemic, it is now seeing some setback to its political influence in countries like Australia, surprising Chinese leadership, Prasad said.

Beijing thought "the political control and economic control they had over much of Asia and other parts of the world would be beneficial," Prasad said.

But he explained that the countries now apparently want to press the reset button.

"The difficulty for most other countries that want to escape China's reach is that they have no alternative to trust," said Prasad.

"The US used to play that role, it doesn't quite play that role anymore, so many countries are fidgeting when it comes to finding that delicate balance between maintaining good relations with China and the US, but we are certainly seeing that a reset begins, "he added.

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