There was an article by Barry Eichengreen this week on the end of the dollar’s reign as reserve currency. It would be replaced by the yuan or the euro.
Michael Pettis identifies some major reasons why this won’t happen (from his newsletter).
First, there’s no realistic way for the world to acquire yuan:
Either China needs to run a large current account deficits, or it needs totally open domestic financial markets in which foreigners can easily acquire domestic RMB-denominated bonds to the tune of several percentage points of China’s GDP annually.
We are unlikely to see either for many, many decades.
Second, people are suspicious of China financial system:
The amount of financial sector reforms required before the RMB can even achieve the yen’s level of acceptance is massive, and in my opinion there has been no significant reform, and in fact a lot of retrogression, in the past decade. Beijing simply cannot permit the necessary amount of capital inflow and outflow until the banks are reformed, liberalized, and made creditworthy.
Third, people are suspicious of China:
The most obvious major countries in the region that can help the process of RMB internationalization – Japan, Russia, India, Korea and to a lesser extent Vietnam and at least one or two others – have a very deep mistrust of China and are unlikely to assist the process beyond some minimum level. Remember that one of the reasons sterling never achieved the dominance that the dollar has today is that the French and the Germans, not to mention some other European powers, actively undermined its role in favour of their own currencies. I don’t see why this won’t happen again.
Fourth, China is already overstating the global yuan trade:
The fact that Chinese companies are now more likely to bill their transactions with their foreign affiliates in RMB rather than dollars makes it seem like its use in trade is soaring (from a very low base), but it changes almost nothing meaningful, and the widely-reported swaps between the PBoC and other central banks consist for the most part either in disguised loans to countries that will take loans from almost anybody, or indirect ways of preserving dollars (as a member of the board of one such foreign central bank told my central banking seminar).
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