China’s Plans for Replacing the Dollar
by ilene - July 21st, 2009 6:39 pm
China’s Plans for Replacing the Dollar
Courtesy of TIME, by Michael Schuman

China’s swipes at the U.S. dollar have been spilling out of Beijing with almost mundane regularity. Every time there is an international economic summit, it seems that some Chinese mandarin reiterates the now familiar complaint that the greenback needs to be replaced as the world’s de facto reserve currency. China usually suggests some "supranational" currency as a dollar substitute, to protect it against instability that could arise from any one country’s errant economic policies. A favorite suggestion is the use of Special Drawing Rights (SDRs), the unit of account at the International Monetary Fund.
But Beijing’s leaders may also see China’s own currency, the yuan (also known as the renminbi), as a possible alternative to the dollar. There are indications that China intends to make the yuan a greater factor in international trade and investment, a development that, if successful, would have major implications for the global financial system. HSBC economist Qu Hongbin believes that the yuan could become one of the top three currencies in the world by 2012, with some $2 trillion in trade transacted in the Chinese currency each year. "The internationalization of the renminbi has become a leading item on the policy agenda" in Beijing, Qu concluded in a recent report.
To an extent, a global role for the yuan appears inevitable. How widely a currency is used around the world is usually a function of how important its home country is to the global economy. During the 19th century, when the British Empire reigned supreme, the pound was the top international currency. Since World War II, that role has been played by the dollar, with the U.S. having by far the world’s biggest economy. Now that China is rapidly charging up the list — it currently ranks third and could overtake Japan as No. 2 as soon as next year — there is good reason to believe the yuan could dash into the big league of global currencies.
Right now, however, the yuan is far from that league. In fact, it is practically nowhere to be found in world currency markets. The reason is Chinese policy. Government restrictions prevent the yuan from trading freely around the world or being fully convertible to other currencies in all financial transactions. The yuan’s…