The Renminbi's Prospects as a Global Reserve Currency

Abstract

Popular discussions about the prospects of China’s currency, the renminbi, range from the view that it is on the threshold of becoming the dominant global reserve currency to the concern that rapid capital account opening poses serious risks for China. A number of recent academic studies have pointed to the renminbi’s rising importance in the international monetary system, although these studies are divided on the renminbi’s prospects of becoming a dominant global reserve currency (see Eichengreen 2011a, Subramanian 2011, Frankel 2012, and Yu 2012). This issue has broader ramifications, as the rise of China’s economy and its currency has implications for global macroeconomic and financial stability. Among the currencies of the world’s five largest economies, China’s renminbi is the only one that is not a reserve currency. Even though the economy has neither a flexible exchange rate nor an open capital account, the Chinese government has recently taken a number of steps to increase the international use of the renminbi. Given China’s rising shares of global GDP and trade, these steps are gaining traction and portend a rising role for the renminbi in global trade and finance.

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