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Ten years after China’s renminbi went global, what keeps it from really challenging the US dollar as a reserve currency?
- China retains tight control over its financial system – in sharp contrast to the US’ open market – to limit exposure to foreign crises, but this keeps its currency from replacing the dollar as the preferred medium for market exchange
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This year marks the unofficial 10th anniversary of what is now widely known as “RMB internationalisation”: the Chinese Communist Party’s attempt to expand the global reach and usage of its currency. Some policymakers and scholars proclaimed the move to be a form of reserve currency succession that would challenge the US dollar as the world’s preferred currency for market exchange.
A decade on, we’re still waiting. Why hasn’t it happened?
It would be helpful to distinguish between a trading currency oriented towards international trade settlements with the issuing country (China) and a fully convertible currency accepted for any purpose, anywhere (the US dollar).
The renminbi falls within the parameters of the first – following the People’s Bank of China’s nascent attempts at currency swaps with a handful of trading partners 10 years ago, almost 40 national central banks have formed swap agreements, with many regularly expanding the amounts.
The underlying objectives of these agreements are to circumvent use of the dollar in trade invoicing to reduce exposure to dollar depreciation and, as the “Belt and Road Initiative” shows, to broaden a China-oriented trading sphere.
Yet immense restrictions remain on foreign institutions’ (much less individuals’) ability to launch portfolio investments and engage in credit provision within China.
Dr Kean Fan Lim is a lecturer in economic geography at the Centre for Urban and Regional Development Studies, Newcastle University, UK.
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