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Report: China’s Currency Will Diminish Dollar’s Role in International Trade

Renminbi now the fifth-most important payment currency in the world

Renminbi
AP
February 11, 2016

The Chinese government has taken steps to promote the international use of its currency, the renminbi, which will diminish the dollar’s role in international trade, according to a report from the Brookings Institution.

The steps China has taken to internationalize the renminbi have been gaining traction and the currency now represents the fifth-most important payment currency in the world.

"The Chinese renminbi, barely visible in international trade of financial flows just three years ago, appears to be blossoming," says William Wilson, a research fellow at the Heritage Foundation. "China is now the world’s largest trading nation, and more corporations, particularly in Asia, are beginning to invoice their business in [renminbi]."

Because of this rise, there is concern that the renminbi could displace the dollar as the world’s dominant currency. According to Brookings, as the renminbi becomes a prominent international currency, it will diminish the dollar’s role in international trade transactions.

"These developments, in tandem with measures taken by China to develop its own payment system, could diminish the primacy of U.S. financial institutions," Brookings said. "This would affect the ability of the United States to continue wielding the financial clout that it currently has as a result of the dollar’s dominance in international finance."

While the report said that the dollar’s prominence may decline, the chance of the dollar being replaced by the renminbi as the world’s dominant currency is low. "China is missing one crucial ingredient: the world’s trust," states the report. "To achieve currency dominance, China needs more than economic and military might; it requires a broader and more credible set of public and political institutions."

"China is missing one crucial ingredient: the world’s trust," states the report. "To achieve currency dominance, China needs more than economic and military might; it requires a broader and more credible set of public and political institutions."

Kevin Freeman, a senior fellow at the Center for Security Policy, says that some saw the rise in China as benign and even advantageous to the West, and this type of thinking was a mistake. One of those individuals was Michael Pillsbury, an expert on China and author of the book, The Hundred-Year Marathon, who said that he and many other China experts were taught early on to view China as a helpless victim of the West but admitted later that he was gullible in believing China was headed in a more democratic direction.

"We believed that American aid to a fragile China whose leaders thought like us would help China become a democratic and peaceful power without ambitions of … global dominance," Pillsbury said.

Freeman says the ultimate goal of China is to displace the United States as the world’s sole superpower. "The same people who say that the [renminbi] will be a benign global reserve currency now were those who said it would never happen a few years ago," he says. "There is no doubt in my mind that China is committed to de-Americanize the world and would love to replace the dollar as soon as possible."

"The same people who say that the [renminbi] will be a benign global reserve currency now were those who said it would never happen a few years ago," he says. "There is no doubt in my mind that China is committed to de-Americanize the world and would love to replace the dollar as soon as possible."

According to the report, the renminbi’s role in the international monetary system is based on three elements: its use as an international medium of exchange, whether there are restrictions on inflows and outflows of capital, and whether it can be held as a reserve currency.

According to Brookings, the renminbi’s role in the global monetary system is dependent on the speed and manner in which China opens its capital account and develops its financial markets.

"So long as China continues to make progress on financial sector and other market-oriented reforms, it is likely that the [renminbi] will become an important reserve currency within the next decade, perhaps eroding but not displacing the dollar’s dominance," states the report.

Published under: China