Cornell University trade policy professor Eswar Prasad believes that although China’s digital renminbi will enhance the role of the renminbi as an international payment currency, it will not weaken the U.S. dollar as the main currency.
In an article published this week in Project Syndicate, he said that a few years ago, China’s renminbi rose to its global dominance and became the fifth currency in international payments. In 2016, the International Monetary Fund included it in the major currency basket that determines the value of Special Drawing Rights (IMF’s global reserve assets). However, the share of international payments in RMB has since fallen below 2%, and the share of global foreign exchange reserves held by RMB-denominated assets has also stabilized at around 2%.
He mentioned that China has surpassed the United States and other advanced economies in terms of the technical complexity of retail payment systems. Therefore, the digital renminbi seems to give China an advantage in the global financial market dominance competition. But the reality is more serious. Although China’s digital renminbi can bypass the Western-dominated SWIFT system for international payments and thus circumvent US financial sanctions, it has little effect on whether foreign investors regard the renminbi as a reserve currency.
Prasad believes that the reason is that the Chinese government still restricts the inflow and outflow of capital, while the People’s Bank of China still manages the RMB exchange rate. Both policies are unlikely to undergo major changes in the short term. This makes it unlikely that domestic and foreign investors will regard the RMB as a safe-haven currency during the global financial turmoil.
He mentioned in the article that although the Trump administration in the US is weakening the independence of the US government, the foundation of the rule of law and the Federal Reserve. But in international finance, everything is relative. The U.S. economic dominance, deep liquid capital market, and still robust institutional framework all mean that the renminbi still cannot compete with the world’s leading reserve currency, the dollar.
Prasad believes that the growth of the renminbi on a global scale is mainly to replace the original share of currencies such as the euro and the British pound. Even if the International Monetary Fund added the renminbi to the Special Drawing Rights basket with a weight of 10.9%, the main concessions were the euro, the pound sterling and the yen, not the dollar.
In the conclusion, he mentioned that the Chinese government should continue to reform the financial market and remove restrictions on capital flows in order to promote China’s central bank digital currency and national cross-border payment system on a global scale.