Could China’s Yuan replace the US dollar as the world's dominant currency? How the Asian nation's trade supremacy is quickly boosting its reserve status
Could China’s Yuan replace the US dollar as the world’s dominant currency? How the Asian nation’s trade supremacy is quickly boosting its reserve status

China’s economy has been immensely successful by most measures. Its gross domestic product (GDP) of $17.7 trillion is second only to the United States. It’s also the third-largest trading nation in the world — behind only the U.S. and E.U.

However, China’s currency — the renminbi — only accounts for 3% of global trade. Compare that to the 87% market share of the U.S. dollar.

Despite its economic and political power, the country doesn’t dominate the global flow of fiat currency. Now, it’s looking to change that.

Here is China’s multitrillion, multidecade plan to replace the U.S. dollar as the world’s reserve currency.

Achieving reserve currency status isn’t a formal process. Instead, it’s like winning a popularity contest.

The most popular currency for global trade and cross-border commerce emerges as the de facto reserve currency. The “popularity” of a currency is simply based on the perception of security and resilience of the issuing country. This is the asset or currency that most central banks across the world prefer to hold in reserve, which is why the dominant asset earns the label of “reserve currency.”

Since 1450, there have been six major reserve currency periods. Portugal dominated the global reserves until 1530 when Spain became stronger. Currencies issued by the Netherlands and France dominated world trade for much of the 17th and 18th centuries. But the emergence of the British empire made the Pound Sterling the reserve currency until the end of the First World War.

The U.S. dollar displaced the pound just as America gained economic superiority over Britain. More than 75% of global transactions have been completed in U.S. dollars since 2008. The dollar also accounts for more than 60% of foreign debt issuance and 59% of global central bank reserves.

Although the dollar’s grip on all these markets and instruments has been gradually declining in recent years, no other currency comes close to these levels. The Chinese renminbi certainly isn’t a viable alternative, but geopolitical and macroeconomic trends support its rise to dominance.

Last year, Chinese leaders made it clear that they wanted to boost the renminbi’s profile as a reserve currency. China’s economy and trade flows are large enough to support such a move. However, the country now needs to convince foreign central bankers to start holding the Chinese Yuan (the principal unit of the renminbi) in reserve.



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