Could the Chinese Yuan overtake the US dollar as the main reserve currency?
By most standards, China’s economy has been incredibly successful. With a GDP of $17.7 trillion, it ranked 2nd just behind the United States. It is also the third-largest trade country in the world, after the United States and the European Union.
However, only 3% of world trade is conducted in China’s currency, the renminbi. In comparison, the US dollar has a market share of 87%. Despite having considerable economic and political strength, the nation does not control the flow of fiat money globally. It now seeks to alter that.
In this article we will tell you about China’s multitrillion-dollar, multidecade strategy for replacing the US dollar as the world’s reserve currency.
How does a currency become a reserve?
What would it take for the Chinese yuan to become the global reserve currency, replacing the US dollar?
Being designated as a reserve currency is not a formal process. It’s more like winning a popularity competition, actually.
The currency that is used the most for international trade and cross-border transactions becomes the de facto reserve currency. A currency’s “popularity” merely depends on how secure and resilient the issuing nation is seen to be. This is the asset or money that almost all central banks throughout the world like to keep in reserve, resulting in it being referred to as “reserve currency.“
There have been six significant reserve currency periods since 1450. Until Spain became more powerful in 1530, Portugal dominated the world reserves. For the most of the 17th and 18th centuries, currencies made by the Netherland and France dominated international trade. But once the British Empire was established, the Pound Sterling served as the world’s reserve currency until end of World War One.
The pound was replaced by the dollar just as America overtook Britain in terms of economic strength. Since 2008, American dollars have been used to settle more than 75% of all international transactions. Additionally, more than 60% of new foreign debt issues and 59% of global central banks’ reserves are denominated in dollars.
No other currency even comes close to matching these levels, despite the dollar’s dominance of all these products and markets rapidly waning in recent years. Despite the fact that the Chinese RMB is not a reasonable alternative, geopolitical and macroeconomic dynamics favour its rise to supremacy.
What would it take for the Chinese yuan to replace the US dollar as the world’s reserve currency?
Strategy of China to dethrone the U.S from the super power status of the world.
Chinese authorities made it plain this year that they wished to raise the renminbi’s standing as a reserve currency. The size of China’s trade and economic flows can accommodate such a change. The nation must now persuade foreign central banks to begin holding reserves of the Chinese Yuan, which serves as the renminbi’s basic unit.
To do this, the People’s Bank of China launched a collaboration with five governments and the Bank for International Settlements in July. China would each contribute 15 billion yuan ($2.2 billion), or Indonesia, Malaysia, Hong Kong, Singapore, and Chile to the Renminbi Liquidity Arrangement.
In the meantime, Russia has already adopted the Chinese Yuan as its de facto reserve currency. Following sanctions imposed by the West as a result of Russia’s invasion of Ukraine early this year, the Russian leadership turned to China. Currently, 17% of Russia’s foreign exchange reserves are in yuan. The third most sought-after currency on The Moscow Exchange is the yuan.
The yuan’s position as a reserve currency may solidify if these alliances grow stronger.
The worldwide impact
A paper on the yuan’s potential as a reserve currency was published by economists including Camille Macaire of France’s central bank and Barry Eichengreen of the University of California, Berkeley. The academics argue that it won’t be simple or quick to replace the dollar. However, they discovered proof that yuan reserves have been progressively rising in nations with closer trading ties to China.
In a “multi – polar” world, the yuan may replace the U.S. dollar as a result of its expanding dominance. In other terms, China may gradually reduce the influence of the dollar. The renminbi’s current standing, according to the study’s authors, is comparable to that of the American dollar in the 1950s. According to that remark, it might only take a few decades for the yuan to close that gap.
Long-term investors should think about having some access to yuan-denominated assets as well as Chinese stocks with sizable yuan profits if the predictions come true.