Can the Renminbi take the Dollar's place?

The next reserve currency?

With the US dollar falling behind for nearly five months against a basket of currencies, is it time to replace the dollar as the global reserve currency? And what currency is fit to take the greenback’s current title? Will it be the Euro, Japanese Yen or the Chinese Renminbi.

Over the past centuries, reserved currencies have existed to facilitate business and commerce amongst nations. In the 1700s, the UK Pound, French Franc and Dutch Guilder were among the widely used monetary unit.  Then the US dollar and Russian Ruble came into the picture during the 1800s until the 1900s. It was after World War II that an international financial system was set up, thus placing the US dollar as a reserve currency.

Presently, the greenback is the most widely-held reserve currency in the world. But with the economic crisis in tow, the dollar has fallen sharply against some other major currencies. And with the downgrade of U.S. debt ratings, Kathy Lien said that “this would be a perfect excuse to push through an alternative reserve currency to replace the dollar because it would strip the confidence of sovereign funds”. Come to think of it, the United States’ current humongous budget and trade deficits is quite similar at the time when UK faced the same problems after the first and second world wars, thus the Pound Sterling lost its status as the primary reserve currency.

The Euro on the other hand is currently the second most commonly held reserve currency. But the Euro is facing concerns about the long can the European Monetary Union hang on. Other currencies remain as minor reserve currencies such as the Japanese Yen, British Pound and Swiss Franc. However, one currency is outright challenging the US dollar to be replaced as the global reserve currency—the Renminbi.  

The rise of China will undoubtedly be one of the great dramas of the twenty-first century. Right now, China ranks third in terms of GDP (gross domestic product) for 2008. And within 2 to 4 years, China may overtake Japan as the second-largest economy. And though many are saying that the Renminbi is not yet ready to achieve a global reserve currency status, China is already preparing for it to happen.

China’s central bank governor Zhou Xiaochaun has already proposed to create a super-sovereign reserve currency as part of reform in the international monetary system. The Asian giant also made currency swap arrangements with Indonesia, Belarus, South Korea, Hong Kong and Malaysia. It's also preparing for trade settlement in the Chinese currency with Hong Kong, Macau and the Association of Southeast Asian Nations.

This is what Professor Nouriel Roubini wrote in his post in the NY Times about the renminbi: At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen.

And when that happens, the United States would suffer.

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