September 18, 2015

September 18, 2015 | Commentary on Economic Growth, China

China's Reminbi not a Threat

For the past 70 years, the U.S. dollar has dominated the international monetary system. Despite a decade of weak economic growth and a growing mountain of national debt, the U.S. Dollar's status as the world's reserve currency has not been diminished. However, many feared that the Chinese reminbi (RMB) threatened this coveted position and the economic advantages it affords.

China is now the world's largest trading nation, and more corporations, particularly in Asia, are beginning to invoice their business in RMB. China is pushing for international monetary system reforms in order to promote using the RMB for international transactions. Back in Beijing, newly minted financial institutions are being created as platforms for expanding the use of the RMB.

 China's share of world exports rose from 3.9 percent in 2000 to 12.4 percent in 2014, surpassing the U.S. as the world's leading trading partner.

In December 2014, the RMB surpassed the Canadian and Australian dollars to become the world's fifth-most-used currency for trade settlement.

 In 2009 China has signed currency-swap agreements with various south-east Asian and Middle Eastern nations as a means of by-passing the U.S. dollar as a currency of exchange.

According to Deutsche Bank, in 2013, 17 percent of China's trade was settled in RMB, up from almost nothing in 2009.

 The rise of the reminbi and the struggles of the U.S. economy should have jeopardized the dollar's reserve currency status. But it appears the opposite is true. Foreign investors have sharply increased their holdings of U.S. financial assets. The U.S. dollar is used in 87 percent of all foreign exchange transactions in foreign exchange markets that exceed $5 trillion per day. The strength of the dollar in trying times appears to be a function of the "size, depth, and openness of America's financial markets." 

-William T. Wilson, "Washington, China, and the Rise of the Renminbi: Are the Dollar's Days as the Global Reserve Currency Numbered?", Heritage Foundation. August 17, 2015.

-This piece originally appeared in the National Center for Policy Analysis.

About the Author

William T. Wilson, Ph.D. Senior Research Fellow
Asian Studies Center