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Extract from our "Chinese RMB’s International Currency Status" research paper, published 20th May 2021

China’s economic might remains leaps and bounds ahead of its currency might. Considering China’s GDP, the size of the government debt market, and the scale of its international trade, the trading of RMB in international markets should be 12 times higher than the current trading volume of the RMB. We expect the RMB to continue to gain market share from exceptionally low levels, but there are daunting challenges for the RMB to ever rival the dollar as an international currency.

1. The US dollar’s hegemonic status in the international currency markets has not waned in the past 30 years, contrary to prevalent presumption. While the dollar’s market share in global official reserves has indeed declined over the years, its international currency status has not. Of the USD6.6 trillion in daily turnover in the currency markets, the dollar accounts for 88 percent of one leg of the transactions, compared to 87 percent in 1998.

2. The issue with the Chinese RMB’s minute international status is the significant imbalance between the size and sophistication of China’s real economy versus its financial sector. A big part of this lop-sidedness between the real and the financial world of China has to do with capital controls, but it also reflects some intrinsic flaws in China’s financial system.

3. Having said this, however, China shifted its focus in 2018 to reforming the financial sector, under the leadership of Mr GUO Shuqing. We should continue to see market liberalisation, reform, general upgrading, and opening of the Chinese financial markets. This should in turn significantly boost the Chinese RMB’s market share in international trading. But it seems unlikely that the Chinese RMB can come close to challenging the dollar’s international status in the foreseeable future.

4. The EUR has also punched below its weight: its actual market share in the currency markets is only around two-thirds of what is implied by its economic size and trade. At the launch of the euro in 1999, many pundits confidently declared that the EUR would supplant the dollar’s hegemonic international currency status. The reality is that EUR’s share in global currency trading has actually gone down since then: 51 percent in 1998 compared to 35 percent market share in 2019.

Bottom Line

Based on the size of China’s GDP, its sovereign bond market, and its international trade, China’s RMB should in theory account for 50 percent of the world’s currency turnover (200 percent over two legs in currency trades); instead, the actual turnover of the RMB is only 4 percent. The international presence of the RMB is too low and will almost certainly rise over time. The most essential pre-condition for the RMB to rise in its international stature is further development and liberalization of its financial sector, which Beijing has been focused on since 2018. The popular prediction that the RMB will soon supplant the dollar as the hegemonic international currency is premature. The hegemonic international status of the dollar is like the English language: while one could debate if English is superior or inferior to French or Mandarin Chinese, it is the most popular language in the world and this incumbent status is very difficult to supplant; just look at the EUR’s experience in the past 20 years. The biggest risk to the USD’s hegemonic international status is its Modern Monetary Theory-like policies and the US’ attitude of taking the dollar’s status for granted.

Extract from "Chinese RMB’s International Currency Status", published 20th May 2021

Sections included within this report are:

  • Reserve currency and international currency status
  • The BIS’ triennial survey on currency trading
  • A ‘fair market share’ concept
  • Capital flows are 50 times trade flow
  • EUR also punching below its weight
  • China’s weakness is its financial sector
  • RMB’s future is bright, but the USD will remain king
  • Central bank digital currencies and crypto currencies
  • Modern Monetary Theory and irresponsible macro policies

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