15. Will the Renminbi Emerge as an International Reserve Currency?
This paper argues that the world needs a greater role for alternative currencies in order to strengthen the global reserve system. A gradual evolution to a multi-currency system is desirable because it reduces the ever-growing balance of payments deficit pressure on a single reserve currency issuer and provides alternatives for countries to diversify their foreign exchange currency holdings.
This paper focuses on the role of an Asian currency in the global reserve system. Given the continuing strong growth of the People’s Republic of China (PRC) and its expanding influence in the world economy, it is quite natural that the renminbi emerges as a new international currency. This is however, contingent on PRC authorities' acceptance of a more convertible capital account and development of an efficient financial system.
The current global financial crisis has hampered the long-term prospects of both the US dollar and the euro as reserve currencies. The crisis has compromised both currencies as safe-haven stores of value. The renminbi is not a significant international currency yet. But simulations show that once the currency were to become more convertible, the renminbi can gradually grow to become an international currency within the region and beyond—sharing from about 3% to 12% of international reserves by 2035. As other major currencies stagger, however, the renminbi may rise more quickly as an international currency than many anticipate.
Creating a more efficient, stable, and equitable global reserve system is a vital priority for emerging economies, which depend heavily on international trade and capital flows for their growth and development. The internationalization of the renminbi will offer an alternative to the US dollar and the euro. The well-functioning multi-currency system with an expanded role for the renminbi as an international currency can play an important part in maintaining global financial stability and sustained growth.