Is China Positioning Itself to Become the Next Global Reserve Currency?

Chinese yuan may take the place of the dollar in the next couple of decades

Not too long ago, China made headlines by calling for a new global reserve currency — one that wasn’t dependent upon the U.S. dollar. Instead, China suggested, make the reserve currency based on Special Drawing Rights. However, most countries greeted the idea with contempt. And conspiracy theorists speculated that the suggestion was a ploy to get people thinking beyond the dollar, preparing the way for the Chinese yuan.

And it certainly seems as though China is trying to make way for the yuan. Currency swaps with emerging markets have been entered into (notably with Argentina). And companies may start issuing bonds in yuan. Additionally, Russian leaders suggested that China could be the reserve currency within 10 years.

There are some snags, however. The main issue that the Chinese yuan remains largely pegged to the U.S. dollar. Without some sort of flotation on the global currency market, the yuan could not become a viable alternative to the greenback. The Forex Blog reports on the problems facing the Chinese yuan:

It doesn’t make sense for risk-averse investors to hold a currency that is still essentially pegged to the US Dollar and that isn’t fully convertible. If there’s no pretense that the Yuan fluctuates in accordance with market forces, and if investors aren’t guaranteed the ability to withdraw RMB if need be, what possible reason would they have to hold it in the first place?

However, if China allows the yuan to float a little more freely, and the country continues on its current path to becoming a world economic superpower, chances are that the U.S. dollar could be supplanted as the reserve currency of choice. But it would likely take 15 – 25 years.