The US has been the dominate economic power for the past 70 years because it is the world’s biggest economy, but equally for another very important reason – the US dollar is the global currency benchmark, the Reserve Currency which most central banks, governments and investors see as unimpeachable.
But as our colleagues at BI US wrote overnight, the US is not likely to be the world’s biggest economy by 2030 and the Chinese clearly understand the importance of using the intervening period to try to unseat the US dollar as the globe’s only reserve currency.
Quietly, over many years, the Chinese have been agreeing swap lines with many Central Banks around the world in an effort to expand the global reach of the its currency the Yuan or RMB. The ANZ says that so far there are 23 swap agreements worth $2.5 trillion. One of the key goals of the swap lines, the ANZ says, is to legitimise the RMB:
Regulatory legitimacy: As central banks formally recognize the status of RMB through the swap, banking and financial regulators will allow local financial institutions to deal with RMB. This symbolism also lifts the private sector’s appetite for transacting in RMB.
China is playing a long game. Recent shenanigans in Washington over the debt ceiling have reminded foreign exchange managers and traders that they need another reserve currency.
The Euro is not it, Japan neither and the pound had its day in the sun a century ago.
China is readying the RMB to step into the breach.