China has already made its aim to establish the renminbi as a global currency, possibly even replacing the American dollar as the world’s reserve currency. Recent moves to ramp up the gradual liberalization of the renminbi, which is currently allowed to trade only within a narrow trading band, and other actions suggest that China may be preparing for a major push to establish its currency as a major global reserve currency.
Business is now conducted on a global scale, with companies often managing operations in dozens of countries. Nearly every country is now intertwined in a complex network of international trade with goods and resources flowing from one spot to another. This has given rise to the need to for a global reserve currency to help conduct international transactions.
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Dollar is the most widely used currency in the world
Traditionally speaking, the American dollar has acted as this reserve currency. The dollar is the most widely used currency in the world, and most commodities, such as oil, are priced in dollars. Many countries keep huge dollar reserves on hand to facilitate trade. China, for example, is believed to have some 3.2 trillion dollars worth of reserves. Even the tiny city-state Singapore has over 250 billion dollars in reserves.
With the U.S. economy lagging, however, and as the American government continues to pile up debt, many parties are looking for alternatives to the dollar. OPEC, for example, plans to begin pricing oil using a basket of currencies and may start doing so as soon as 2018. Such moves suggest that the dollar may slowly be losing its position as the premier global reserve currency.
China has been working diligently to position the renminbi as a global alternative to the dollar. Already, China has set up direct currency swapping agreements with several countries, including Brazil, the US, and Japan. In regards to Japan and Brazil, this allows the two countries to conduct trade directly and without need of US dollars, which are normally used to price international transactions.
China is also slowly liberalizing the renminbi itself, which is currently allowed to trade only within a narrow trading band. The new Shanghai free trade zone, for example, will allow for full convertibility, allowing companies to easily purchase and sell renminbi. If such reforms prove fruitful, they could be adopted on the national stage and eventually lead to full liberalization of the currency.
China has massive foreign services of its own
With the on-going problems in the Eurozone, the Chinese renminbi is now emerging as perhaps the biggest challenger to the U.S. dollar. The Chinese economy continues to record solid, if uninspiring, even amid a global slow down in the global economy. China has massive foreign services of its own, amounting to trillions of dollars of stashed wealth. Such massive reserves will allow China to regulate prices even in open markets.
At the same time, Washington’s continued games in regards to reducing the deficit, controlling government spending, and raising debt levels, are making countries and institutions around the world nervous and ready to at least consider alternatives to the dollar. The Chinese government’s ability to literally command situations and adapt extremely quickly to changing circumstances, makes it an ideal alternative, at least from the standpoint of governance.
China taking steps to promote its currency
While the United States’ government is bogged down in infighting, the Chinese government still has an ability to rapidly react to dynamic circumstances. For nations looking for a stable alternative to the dollar, the renminbi will continue to grow more and more attractive, especially as China takes steps to promote its currency as a truly global currency.