In comparison to past instances of currency transition, will the Renminbi replace the Dollar as reserve currency of the international financial system?
Date of Issue2014
S. Rajaratnam School of International Studies
In recent years China's phenomenal growth has led to speculation that its currency, the Renminbi, will overtake the Dollar as reserve currency of the international financial system. This paper will argue that China has many weaknesses that will prevent the Renminbi gaining an international role, a prerequisite to becoming a reserve currency. These weaknesses will be illustrated by comparing China to historical case studies, in which countries have experienced their currencies change from domestic to international usage. The differences between China and the historical examples show that the country lacks many of the attributes considered necessary for an international currency. Setting a historical precedent, China is relying almost exclusively on its large economy to internationalise the currency. A reliance which imposes numerous risks as the country conducts a fundamental adjustment of its economic model, the success of which is jeopardised by numerous domestic factors. Not only does the Renminbi face barriers preventing an established international role, the currency also faces barriers of a different nature, which will prevent any replacement of the Dollar. The numerous weaknesses of the Renminbi will therefore prevent the currency from disrupting the long dominance of the Dollar.