Us Think Tanks Say The Yuan Will Take The Place Of The US Dollar In About Ten Years.

According to the financial times, Arvind, Subramanian, a senior fellow at the Pedersen Institute of international economics, recently wrote for the financial times that the yuan will replace the US dollar in the next ten years or ten years and become the world's main reserve currency.

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The United States and Europe

Skeptics will mock this expectation for two reasons.

First, even if China's economy surpasses the US, the rise of the renminbi will probably lag behind.

The US economy overtook Britain in the early 1870s, but before the Second World War, the dollar completely replaced the pound.

This means that there may be a lag of about 70 years between the local currency becoming the main reserve currency and its dominant position in the world economy.

Second, China has far from creating the renminbi to become a reserve currency.

In other words, the market is loyal to the US dollar and China lacks the necessary policy conditions. These two reasons make the rise of the renminbi become a distant possibility.

This is wrong.

First of all, the usual historical analogy is actually misleading.

Britain gave up its economic dominance at a later time than some people thought, while the pound gave up its main reserve currency status earlier than some people thought.

In the sense of the determinants of reserve currency status, the size of the economy and its trade and external financial strength affect the dominant position of the economy.

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Second, China, as an economic power, has almost caught up with the United States.

According to purchasing power, China's economy is roughly the same size as that of the United States, and its export and overseas assets are much larger than that of the United States.

If a proper historical analogy is to be made, the dollar's letting go may take place within ten years.

China's economic strength has created conditions for the rise of the renminbi.

Of course, this is not necessarily the result.

China still needs to carry out major policy reforms.

However, the internationalization of RMB has entered an irreversible process in a way with Chinese characteristics.

This is a process based on micro management, government intervention and pilot countries and regions.

Every day it seems that a country or a foreign enterprise is allowed to use Renminbi in a wider range of options.

A plan just launched last week is designed to promote London as a possible offshore renminbi trading hub as a complement to similar plans in Shanghai and Hongkong.

Whether or not to expand the experiment will depend on its success.

Why does China want to turn the renminbi into a reserve currency?

The answer is that the Chinese authorities have been looking for a way out of the controversial growth strategy that has lasted for decades.

The strategy is to drive growth by lowering the valuation of the renminbi and closing the economic door to overseas capital.

The internationalization of RMB provides such an exit method.

As China gradually abandons mercantilism and RMB appreciation, the trade department, which is most profitable because of the undervalued RMB, will strongly oppose it.

To overcome this objection, the Chinese authorities can stress the positive significance of RMB becoming the international reserve currency.

The argument will be that promoting the rise of the renminbi as a reserve currency and replacing the US dollar will bring more benefits to the prestige of the country than the loss and chaos caused by the appreciation of the RMB.

When China's policymakers are struggling to find a way out of mercantilism, "the rule of the renminbi" will become their slogan and even life-saving.

The slogan, which is set up in China, may also become a reality in the external world, which may take less time than most people imagine.