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The Year of the Renminbi?

Summary:
After years of poor policy and political tumult in the United States, it is not unreasonable to ask whether China's currency will soon be in a position to challenge the greenback. While neither country has been doing itself any favors in the currency pageant, it is worth remembering that history is not on America's side. NEW DELHI – When the billionaire investor Ray Dalio recently predicted that the Chinese renminbi will become a global reserve currency, the world took notice. It’s a prediction that the Chinese government has encouraged through its own efforts. The question now is whether the coming “Year of the Ox” will bring the decisive shifts needed to position the RMB to fulfill policymakers’ ambition.

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Arvind Subramanian considers the following as important:

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After years of poor policy and political tumult in the United States, it is not unreasonable to ask whether China's currency will soon be in a position to challenge the greenback. While neither country has been doing itself any favors in the currency pageant, it is worth remembering that history is not on America's side.

NEW DELHI – When the billionaire investor Ray Dalio recently predicted that the Chinese renminbi will become a global reserve currency, the world took notice. It’s a prediction that the Chinese government has encouraged through its own efforts. The question now is whether the coming “Year of the Ox” will bring the decisive shifts needed to position the RMB to fulfill policymakers’ ambition.

Like a beauty pageant, the contest for reserve-currency status is one of relative attractiveness. International traders and investors must decide which among the currencies available to them is most convenient to use, is supported by the strongest financial system, and – perhaps most important – enjoys the backing of a trustworthy sovereign. What is new today is that both of the world’s major sovereigns also seem to be competing to reduce their own trustworthiness.

Relative attractiveness is difficult to quantify. But underlying this concept is one factor that can be measured precisely: the size of the issuing country’s economy. As the economist Paul Krugman explained in a 1984 paper, “the currency of a country which is important in world markets will be a better candidate for an international money than that of a smaller country.” In other words, a globally dominant economy is the “hardware” for an international reserve currency.

China, clearly, has the necessary hardware. It been the world’s largest trader since 2013, its economy is now larger than that of the United States in purchasing power parity terms, and soon it will pull ahead in terms of market exchange rates, too. For these reasons, one of us (Subramanian) pointed out a decade ago that the renminbi would come to rival and eventually eclipse the dollar.

Since then, China has made great progress in boosting the renminbi’s relative attractiveness. Its economy has continued to grow...

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