Will China’s Renminbi Replace the Dollar as the World’s Top Currency?

Will China’s Renminbi Replace the Dollar as the World’s Top Currency?

A ChinaFile Conversation

Patrick Chovanec:

This week’s news that Brazil and China have signed a $30 billion currency swap agreement gave a renewed boost to excited chatter over the rising influence of China’s currency, the renminbi (RMB). The belief, in many quarters, is that the renminbi is well on its way to becoming an “international” currency—and many, both inside and outside China, are convinced it will inevitably eclipse the U.S. dollar as the world’s leading reserve currency.  China is destined to surpass the U.S. as the world’s largest economy, the thinking goes, so just like everyone uses dollars now, they will soon be using RMB.

I would argue that this excitement is vastly over-hyped. China’s much-heralded swap agreements with Brazil and other countries give the impression that those nations are now holding RMB as a reserve currency. They are not. After the Lehmann Brothers collapse in 2008, international markets for trade financing in dollars seized up for several days, until the Fed stepped in to provide more dollars to get the markets working again.  China’s swap agreements are an emergency backstop in case that ever happens again.  In the meantime, no actual money is being swapped.  If it ever came to that, Brazil’s temporary stocks of RMB would be used for the limited (but important) purpose of keeping trade alive until a more readily traded currency, like dollars or euros, became available again. There are three basic criteria for a nation’s money to serve as an attractive global currency:

1) There must be a great deal of demand to buy what your country has to offer;

2) There must be a ready place for them to put your currency, while waiting to spend it;

3) There has to be a ready way people in other countries can get their hands on your currency in the first place.

China’s renminbi only fulfills one of these criteria, the first: there is a great deal of global demand for what makes. Plenty of people around the world would be happy to pay in RMB to buy Chinese goods. But where would they save and invest that RMB in the meantime? About 40% of the world’s capital markets are in dollars; China accounts for just 4%. Much of that is in Hong Kong dollars, not RMB, and most of it is in riskier stocks, not the safer bonds that are good for stockpiling money. Because China’s domestic markets are mostly closed to foreigners, and the RMB isn’t freely convertible, moving money into and out of Chinese investments isn’t easy. That may be gradually changing, but it won’t happen overnight, and right now there’s no good place to put large quantities of RMB.

Of course, that assumes you, as a foreigner, can get your hands on large quantities of RMB in the first place. China runs large trade surpluses and, until very recently, has been receiving more investment funding than it sends abroad.  Through both channels—the current and the capital account—China has been a net importer of currency.  For the RMB to be widely accessible beyond China’s borders, China must export currency. That means running a trade deficit, or opening the doors to a lot more investment money flowing out of China than China's control-minded leaders have been comfortable with so far (allowing money to flow abroad like that could pose serious challenges to the way China's closed financial system currently functions).

The main point that a lot of people miss: for the RMB to become a truly global currency, China’s entire relationship with the rest of the world economy would have to change, in ways the Chinese have strongly resisted so far.  (This is the main reason, by the way, that Japan, even when it was riding high in the 1980s, deliberately chose not to embrace a much larger international role for its currency, the Yen).


Patrick Chovanec is Managing Director, Chief Strategist at Silvercrest Asset Management and a former professor at Tsinghua University. His insights into Chinese business, economics, politics, and...
Damien Ma is a Fellow at The Paulson Institute, where he focuses on investment and policy programs and the Institute’s research and think tank activities. He is the co-author of In Line Behind a...
Donald Clarke is a professor at the George Washington University Law School in Washington, D.C., where he specializes in modern Chinese law, focusing particularly on corporate governance, Chinese ...
Barry Naughton is the So Kwanlok Chair of Chinese International Affairs at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. Naughton is...





The China Africa Relationship: Crossroads or Cliff?

Cobus van Staden, Eric Olander, Huang Hongxiang from ChinaFile Conversation
Eric Olander and Cobus van Staden publish the China Africa Project web site, whose weekly podcast we are proud to syndicate.  As we approach the sixth Forum on China Africa Cooperation Summit in Johannesburg, we’ve also picked up written...



Is China a Credible Partner in Fighting Terror?

Andrew Small, Chen Weihua, Wei Zhu, Eric Hundman from ChinaFile Conversation
In the wake of the terror attacks in Paris China’s foreign minister Wang Yi said, “China is also a victim of terrorism. The fight against the ‘East Turkestan Islamic Movement’… should become an important part of the international fight against...



How Can China’s Neighbors Make Progress at APEC?

Le Hong Hiep, Brian Eyler from ChinaFile Conversation
Ahead of the Asia-Pacific Economic Cooperation (APEC) Summit next week, we asked a group of experts from China’s neighboring countries what they thought the main thrust of discussion in Manila should be. If host, the Philippines, under pressure from...



The China-Taiwan Summit

Richard Bernstein, Andrew J. Nathan, Jerome A. Cohen, Ho-fung Hung, Wei-chin Lee from ChinaFile Conversation
This Saturday, for the first time since 1949, the leaders of China and Taiwan will meet face to face. Xi Jinping and Ma Ying-jeou will meet in Singapore, not as Presidents, but—to sidestep one of many lingering areas of conflict since the Chinese...



How Far Have China’s Economic Reforms Come over the Past Year?

Houze Song, Arthur R. Kroeber from ChinaFile Conversation
As the Chinese Communist Party leadership wrapped up its Fifth Plenum, the meeting at which the Party’s leadership set the Five Year Plan that will shape economic policy through 2020, what progress has been made on the “comprehensive deepening” of...



Making Waves in the South China Sea

Peter Dutton, Jessica Chen Weiss, Andrew S. Erickson, Elbridge Colby from ChinaFile Conversation
Challenging China’s newly assertive behavior in the South China Sea, this week the U.S. Navy sailed some of its biggest ships inside the nine-dash line, exercising its claim to freedom of movement in international waters plied by billions in trade...



Britain: ‘China’s Best Partner in the West’?

Isabel Hilton, Sebastian Heilmann , Jonathan Fenby, Sophie Richardson, Robert Barnett from ChinaFile Conversation
This week, Xi Jinping is in Great Britain for a state visit, his first since assuming leadership of China nearly three years ago. Britain’s government under David Cameron has signaled—increasingly loudly in recent months—that it hopes to usher in a...



Is There a China Model?

Daniel A. Bell, Timothy Garton Ash, Andrew J. Nathan, Taisu Zhang, Mark Danner, Rebecca Liao, Ryan Mitchell from ChinaFile Conversation
The most recent public event in our ChinaFile Presents series, which we held October 15 in New York, was a discussion of the philosopher Daniel A. Bell’s controversial book, The China Model: Political Meritocracy and the Limits of Democracy, co-...



What Will the TPP Mean for China?

Barry Naughton, Arthur R. Kroeber, Guy de Jonquières, Graham Webster, Robert Kapp, Yoichi Funabashi from ChinaFile Conversation
On Monday, the U.S., Japan, and ten other countries concluded negotiations on the Trans-Pacific Partnership, or TPP—the largest regional trade accord in history. If approved, the agreement will set new terms for the nearly $28 trillion in trade and...



The Future of Autonomy in Hong Kong

David Schlesinger, Denise Y. Ho, Ho-fung Hung, Samson Yuen, Alvin Y.H. Cheung, Edmund Cheng, Sebastian Veg from ChinaFile Conversation
Yesterday, the governing board of Hong Kong University, one of the territory’s most esteemed institutions of higher education, voted to reject the promotion of Johannes Chan, a former law school dean, over the objections of the faculty and students...