The World News Syndicate website published an article”The Year of the Renminbi?”The author is Alvin Subramanian, former chief economic adviser to the Indian government and professor of economics at Ashoka University, and Josh Fellman, head of Jill Hutchinson Consulting. The article is excerpted as follows:
When billionaire investor Ray Dalio recently predicted that the renminbi will become a kind of global When reserve currency, the world is paying attention. The question now is whether the upcoming”Year of the Ox” will bring about the decisive changes necessary to enable the RMB to achieve the ambitious goals set by policymakers.
Like a beauty pageant, the competition for the status of the reserve currency compares relative attractiveness. International traders and investors must decide which of the currencies available to them is the most convenient to use, which is supported by the strongest financial system, and-and this is perhaps the most important-which receives a trustworthy sovereign State support.
The relative attractiveness is difficult to quantify. However, the basis of this concept is a factor that can be accurately measured:the economic size of the country where the currency is issued by . The dominant economy on a global scale is the”hardware” of the international reserve currency.
China obviously has the necessary hardware. China has been the world’s largest trader in goods since 2013. At present, in terms of purchasing power parity, China’s economy has surpassed that of the United States. One of us (Subramanian) pointed out ten years ago that the renminbi will gradually become a competitor of the US dollar and eventually eclipse the US dollar.
Since then, China has made significant progress in increasing the relative attractiveness of the renminbi. China’s economy continues to grow, growing much faster than the United States, and has a stronger ability to recover from the new crown pneumonia crisis. The Central Bank of China has already begun testing digital currency. And customers in the developing world participating in the “Belt and Road” initiative are beginning to use the renminbi in their increasing trade and financial transactions with China.
But the dollar resisted stubbornly. As the chief economist of the International Monetary Fund Gita Gopinat and his colleagues have shown, most trade is still denominated in dollars, and the dollar still plays an important role in cross-border financing.
A key reason for the U.S. dollar’s resilience relative to the renminbi is that the U.S. economy’s hardware has gained strong software In addition, software refers to all the intangible qualities that support investor confidence—especially a powerful banking system backed by a reliable sovereign state. China still has a long way to go in these areas.
People should not be confident that the dollar’s dominance is unshakable. China is still likely to win this reserve currency race, either because the renminbi has become more attractive or simply because the dollar has become less attractive.
It is worth remembering that history is not on the side of the dollar. It is still uncertain whether a clear transition from the US dollar to the renminbi will begin this year. But in the long run, China is confident in the prospects of the yuan.
Source:Reference News Network