Structural changes behind the U.S. dollar, the euro, and the Japanese yen may have started to erode their basic ability to serve as global currencies. This implies that their global influence should fade in the long term. Meanwhile, China is gaining what these G3 currencies are losing by internationalizing the renminbi. President Xi Jinping's "Chinese Dream" is the linchpin of the platform for the rise of the renminbi in the global markets.
The global impact of the renminbi's ascent will be substantial, and even confusing and worrying, because the geopolitical reality behind the future monetary order is that China's global influence is rising at a time when that of the United States and Europe is declining. China's Belt-and-Road initiative is a vision to build trade and investment networks with all roads leading to Beijing.
Arguably, economic and political incentives are aligned for China to transform itself from a large emerging market into an "empire." History has taught us that one of the strongest motives for a country to expand into building an empire is the spectacle of fumbling ineptitude of the existing order. The key economic incentive for building an empire is an attempt by the center to source cheap commodities to produce manufactured goods for sale to the periphery in order to make a profit. The empire-building exercise by China is the political dimension behind the secular rise of the renminbi in the future monetary system.
Does this mean that the Chinese currency will acquire a global reserve currency status soon? Not a chance, because China still lacks many of the economic, political, and cultural attributes that are essential for making the renminbi a global currency. Nevertheless, this does not deter China from building a base for the renminbi's global status. Its biggest challenge is to instill global confidence in the renminbi when it does not have most of the characteristics for serving, on a global basis, as a store of value, a medium of exchange, and a unit of account.
Before the renminbi acquires a global currency status, it can still sit in the center of a regional financial system in Asia. The rise of the renminbi on the global stage is a secular trend that some of us may not like but cannot ignore. Empirical evidence suggests that Asia has already been increasing its linkages with the renminbi gradually by cutting its linkages with the U.S. dollar and the euro.
THE FAILURE OF THE G3 CURRENCIES
Economic development since the 2007-2008 global financial crisis suggests that the basic functions of money of the G3 currencies might have been eroded. First, while the U.S. dollar has always dominated as a unit of account, this may change over the long term as the global dominance of the United States weakens.
Being a new component currency of the Special Drawing Rights (effective in October 2016) and with Beijing continuing the liberalization of the country's capital account, the renminbi will become a growing part of the global financial infrastructure. Notably, China's creation of the Asian Infrastructure Investment Bank, the Silk Road Fund, the New Development Bank, and the usage of its domestic policy banks for international lending are all instrumental in boosting the role of the renminbi under the Belt-and-Road vision that spans from China through...