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How can China break US dollar's dominance?

(China Youth Daily)

13:56, September 20, 2011

Edited and Translated by People's Daily Online

With the internationalization of the RMB progressing on schedule, it is predicted that at least 40 percent of the trade volume of 2015, or about 100 million U.S. dollars, between China and Africa, which is equal to the total trade volume of 2010 between China and Africa, will be settled with RMB, according to the lasted research report issued in the beginning of September by the largest bank of Africa Standard Bank Group.

This is another achievement China has made since it launched the cross-border RMB settlement in 2009. Pang Kaige, chief executive officer of the Standard Bank (China), also said that it is quite possible that countries including South Africa and Nigeria will take RMB as their foreign reserves.

Now, it is two years since China decidedly launched the cross-border RMB settlement pilot project in the wake of the financial crisis, and cross-border RMB settlement has grown from a few domestic pilot cities to all of China. However, the RMB's process of "going global" is still in its preliminary stage. China's foreign reserves are still increasing, and China still has to face risks from the depreciating U.S. dollar.

China's foreign reserve issue is a reflection of the current imbalanced global economy and turbulent global system. Once the credit of the U.S. dollar is shaken, the economy of the whole world will suffer: Whoever depends more heavily on it will suffer more.

Economist Li Caiyuan said, "China's huge foreign reserve indeed has made China in a passive position. In the long run, China will suffer losses. But practically speaking, China should really not abandon the interest of the securities before finding better investment channels."

He believes China has only two fundamental ways to solve this problem. One, China should use the U.S. dollar less while expanding its domestic demand greatly, thus reducing the exports to the United States and increasing the imports. Two, China should use RMB more and expand the scale and range of cross-border RMB settlements.

Guo Shengxiang from the China Actuarial Science Development and Research Center under the Peking University predicts that if a bidirectional exchange agreement is established between the RMB and other currencies, a "one-to-many" exchange, financing and settlement system with the RMB as the center will be established. If a currency exchange center is established around this system and a financing cash pool is established in it, it is possible that the RMB will be the "third pole of the global financial center."

Only when the RMB can "go global," "stay" in the world and "come back" through smooth channels can China's economy shake off the yoke of the U.S. dollar or the euro fundamentally.

Obviously, it will be difficult. Li said that the U.S. dollar has been the world's reserve currency since World War II thanks to the country’s great industrial, scientific and military strength as well as the rapid overseas expansion of U.S. enterprises and financial institutions. At present, there remains a considerable gap between the comprehensive strength of China and the United States.

"China is taking a unique economic development path, and the RMB cannot copy the success of the U.S. dollar," Li said. The U.S. dollar is becoming increasingly "hollow," with most of the country's industries transferred overseas except the arms and financial services industries. By contrast, the RMB remains "solid" based on China's strong manufacturing industry and real economy. While paying attention to European and U.S. markets, Chinese companies should also make investments elsewhere to expand their living space.

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Leave your comment9 comments

  1. Name

PD User at 2011-10-1771.146.24.*
China"s government and central bank are prudent in their approach to make the RMB freely convertible.Better take nominal steps that ensures a sound transition than be dictated by the US to arbitrarily set the exchange rate, a move the US had forced Japan to make with disastrous consequence.
Analyst at 2011-10-13114.76.49.*
It is important to shift trade away from depending upon the US dollar. The dollar will collapse within 10 years and international trade will be disrupted. Countries that have alternatives will fare better than those completely dependant upon the dollar. America will print another 10 trillion worthless junk dollars by then.
Sasi at 2011-10-04122.178.118.*
China will come of age only when it allows its currency to float freely against other currencies.India is smaller than China,its economy is smaller,still the Indian rupee is not fixed by the Indian government but left to the market.
PD User at 2011-09-30117.120.16.*
Being freely convertible is not a pre-requisite for being world currency for trade, investment and financial reserves. There are plenty of currencies in the world that are freely convertible, but very few are world currencies. Currency is essentially a credibility issue of a currency-issuing entity. The common sense is uncontrolled freedom is bound to be ended in a disaster. It just takes some time to unwind the current global financial system while writing the new rules. China must make sure US$ is US’s problem and make the US accountable for its conduct. No more get away from world scrutiny.
Carlos Romanov at 2011-09-2358.35.105.*
First and foremost, the Renminbi must be freely convertible. Until it is, all other measures are nominal steps.
  

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