Why dollar won’t be dethroned by renminbi: Capital Economics
While global fracturing will fundamentally reshape the global economic and financial landscape over the coming decade, the consequences for the dollar are likely to be less dramatic than many now argue, the group chief economist of London-based Capital Economics has said.
Neil Shearing said in a note on Tuesday that the past couple of months has seen an upsurge in the number of analysts arguing that the Chinese renminbi will start to challenge the dollar’s position as the world’s reserve currency.
“But while the amount of world trade that is settled in renminbi is likely to increase over the coming years, this is unlikely to seriously threaten the dollar’s position at the heart of the global financial system,” he said.
The era of globalisation has been replaced by “global fracturing”, the idea that the world is splintering into two blocs: one that aligns primarily with the US and another that aligns primarily with China, according to Shearing.
“More importantly, the emergence of China as a strategic rival to the US is reshaping the global economic system in a way that is causing many to question dollar hegemony,” he said.
He said while much of the debate has focused on the dollar’s status as the world’s preeminent reserve currency, its financial and geopolitical influence stems principally from the dominant use of the dollar in cross-border transactions.
Citing the triennial survey conducted by the BIS, Shearing said 88 percent of transactions in the foreign exchange market in 2022 took place in dollars – almost exactly the same as in the 1980s, when the survey began, while only around 5 percent involved the renminbi.
“What’s more, while trade between countries that align with China is growing, it still accounts for only 6 percent of global trade. In contrast, over 50 percent of global trade takes place within the US bloc, and over 80 percent of global trade involves a country that aligns with the US,” he said.
He said this trade would continue to be denominated overwhelmingly in US dollars.
He said China’s high domestic savings rate means that it will tend to run a large current account surplus, adding that this would in turn work against the renminbi becoming a serious rival to the dollar as a reserve currency.
“China’s capital controls also make it difficult to see the renminbi playing the role the dollar does,” Shearing said.
He said for the renminbi to become a major international currency, China would need to provide the rest of the world with large quantities of safe, liquid and convertible renminbi-denominated assets to serve as reserves for other central banks and collateral in financial markets.
“In turn, that would require a major shift in Beijing’s policy approach, giving up much of the political control over its economy that is a central feature of the current framework,” he added.
He said the dollar has several things working in its favour. “For a currency to be widely used as an international medium of exchange, it must be readily and cheaply available around the world. That depends on foreigners being willing to hold it in large volumes: in other words, it must function as a store of value.”
