China has entered a “new era” where it should “take centre stage in the world” said President Xi Jinping during his opening speech at the 19th National Congress of the Communist Party of China (18-24 October) (Xi Jinping: “Time for China to take centre stage”, BBC News, 18 October 2017). This is poised to have formidable effects on the global economy as well as on the international currency system. Furthermore, to see this happening, we may wonder if the Chinese currency needs not becoming supreme in the international currency system. What is thus the current international state of play for the renminbi and which factors could preside to its future international reign?
This article focuses on assessing the possibility to see China’s Yuan rivalling or replacing the U.S. dollar as the world’s reserve currency, with all the consequent benefits.
As far as the current position of the “redback” is concerned, our analysis shows an increased internationalization as, for example, the Renminbi has been included in the basket of currencies on which the values of the IMF-issued Special Drawing Rights is based. The U.S. dollar, however, is still much more used in foreign-exchange trading and as a store of value at the official level. The greenback, all things being equal, is therefore likely to retain a dominant position in the foreseeable future.
However, keeping in mind that events rarely remain equal and follow expected trends, as first elements towards detailed scenario analysis for the future, we then analyse certain components of the Chinese economy that could help the renminbi in rivalling the international stance of the U.S. dollar. China’s extensive internal market and Beijing’s commercial depth are likely to help the renminbi in strengthening its position on global markets, while China’s financial markets still seem underdeveloped. This is why China’s economic authorities have announced that they will undertake dramatic reforms. Nonetheless, the facts that the judicial system is still controlled by the Communist Party and that the yuan is not fully convertible could hinder the possibilities for the renminbi to rival the dollar, at least in the short-term.
As a conclusion, the reform of the financial markets will be crucial to establish a truly global currency that could have the possibility to be on a par with the U.S. dollar, the two coexisting at the top of the currencies’ ladder. Other events, however, deserve further consideration for a fully detailed and final estimate.
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Featured image: China-CEEC Matchmaking Event 2017. Taken on the 27th of November, 2017 by Elekes Andor (Own work) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons.
About the author: Leonardo Frisani (MA Paris) focuses currently on challenges to the US Dollar supremacy. Beyond that, his specialisation is in international security, and his main interests are in geopolitics, macroeconomics, climate change, international energy and history.
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