Western sanctions that froze much of Russia’s foreign currency holdings since its invasion of Ukraine have underscored the dollar’s power while also highlighting the risks of relying on it heavily. China’s Renminbi (RMB) eventually could develop into a reputable global reserve currency, but Beijing would have to drastically loosen its grip on the economy.
Already, upwards of 70 central banks hold some renminbi as a reserve currency, while many African countries and some in the Middle East regularly use it for transactions. More than 1,900 financial institutions are now using the renminbi for payments with China and Hong Kong. Some central banks have diversified their holdings over the last 20 years, reducing the dollar’s share of global reserves, as per the International Monetary Fund.
The renminbi has seen its popularity as an international currency steadily climb in the last decade. It is one of the most-popular currencies for cross-border payments, notching the fourth spot for the first time since August 2015.
China has pushed for greater Renminbi adoption across Africa, and its recent talks with Saudi Arabia for a renminbi-based oil deal have signaled that nations are at least thinking about some alternative or counterweight to the US dollar. This would snap Saudi Arabia’s 50-year precedent of exclusively trading oil in dollars.
The IMF noted that the dollar has been steadily offset as reserve managers primarily move into two alternative directions, with a quarter turning to the renminbi and three-quarters exploring non-traditional currencies from nations that typically play limited roles as reserve assets.
China overtook the US as the world’s largest goods trader in 2014. The country has been the leading exporter for a decade. Hence there is a disconnect between the highest proportion of the world’s trade going through China and its denomination in the US dollars.
“The use of Chinese currency will inevitably expand and play a much bigger role in the world,” according to Baizhu Chen, professor of clinical finance and business economics at the University of Southern California. “Some countries feel their economies could be held hostage to US policies because the dollar is dominant, and countries want to diversify their risk.”
For now, greenbacks comprise 60 percent of global reserves versus the renminbi’s 2.5 percent. And in global payments volume, the dollar accounts for 41 percent while the Renminbi has about 3 percent, even though China is the world’s second biggest economy. The euro held its second-place ranking with its total market share at 37 percent. The pound followed in the third spot since 2011, while the yen rounded out the top five.
Under the current international monetary system, the US dollar is the dominant invoicing, investment, and reserve currency in the world. The system is highly asymmetric, in the sense that most countries want to maintain a stable exchange rate with the dollar by intervening in the foreign exchange market, while the US does not need to worry about the value of its own currency relative to others.
One of the major reason for failure of the renminbi becoming an international invoicing currency is its lack of market thickness due to China’s capital controls and the lack of capital account convertibility of Renminbi; the immaturity of the Chinese financial system; and the persistent use of the US dollar for international transactions.
For the renminbi to be a leading global reserve currency, China would have to open up its market and loosen government oversight. China also needs to refrain from currency manipulation, like devaluing the renminbi to boost exports.
For China to continue pushing the renminbi to take on a greater share of the global reserve currency, it would have to prove the renminbi’s long-term stability to win the trust of other nations.