BY JOHN MAULDIN, Mauldin Economics
The Chinese renminbi has been recently included in the IMF’s reserve currency basket, which previously consisted of the US dollar, the euro, the British pound, and the Japanese yen.
These currencies represent the developed world’s most stable economies, so having the renminbi among them is a nice compliment to Beijing. It is not, however, an earth-shattering move in other respects.
Many people started asking me whether the Chinese currency will ultimately become the world’s reserve currency.
In short, I don’t see the renminbi overthrowing the US dollar anytime in the next few decades. My crystal ball gets fuzzy after 2036, but for right now, it comes nowhere close to meeting the basic conditions for becoming the major reserve currency.
Let’s think about why it’s very unlikely for the renminbi to replace the dollar anytime soon. China Has a Massive Trade Surplus
When we talk about the US dollar being the world’s reserve currency, what we really mean is that the bulk of global trade is denominated in dollars. And yes, China is doing one bilateral agreement after another in order to trade in its own currency.
Any country that does a great deal of trade with another country can create a bilateral currency agreement to be able to trade in a particular currency, but the great bulk of global trade is still in US dollars.And you are not going to see Mexico, for example, wanting to take the renminbi for its sales of products to Great Britain. Mexicans want dollars they can readily convert back to pesos. Continued from page 1For a country to deliver the currency in which most global trade is done, it must supply that currency “in size” to enable the trading. The United States runs a massive trade deficit, pushing dollars all over […]
