- A new research paper broke down how China can boost the standing of the yuan as a global reserve currency.
- One way this can happen is if China builds credibility that the yuan and dollar have a stable conversion rate.
- Dollar dominance on the world stage won't be going away, but the yuan can still gain status in international use, the authors said.
For China to boost the credibility and influence of the yuan as a global reserve currency, Beijing would have to cement its credibility by promising a stable dollar-conversion rate, according to a new paper from the Center for Economic Policy and Research.
While the yuan won't be overtaking the dollar as the world's primary reserve currency, it is still possible for China to drive more adoption of the yuan by accepting dollar payments for exports, among other strategies, according to the authors, who include economists Barry Eichengreen and Camille Macaire.
"Despite China's still limited capital account openness, the share of RMB in reserves can increase if Chinese trade and RMB invoicing continue to increase," the authors wrote. The renminbi is another name for the yuan.
Nations that hold a trade deficit with China could still build their yuan reserves if Beijing pays for imports in yuan but also takes dollar payments for exports, according to the paper.
This, in addition to China's foreign direct investments, would allow other countries to help increase the volume of yuan in use.
However, China will have to work to gain more credibility with its currency on the dollar-dominated world stage. Beijing must ensure yuan reserves can be converted to dollars at a consistent rate — which means China will have to ramp up its dollar holdings for emergency interventions if necessary, the authors wrote.
As Western sanctions on Russia have revealed in recent months, other countries are subject to severe political and financial influence by the US due to the dollar's status. That may make it seem counterintuitive for China to increase dependence on the dollar.
But, in the authors words: "[T]his peculiar relationship between the world's two largest economies is the only way for China to make the RMB a significant reserve currency without embarking on full capital account liberalization." However, "the RMB can nonetheless undergo an internationalization process with Chinese characteristics."
In March, the International Monetary Fund said China's yuan and other currencies had gained on the US dollar's global standing as a reserve currency. China for years has pushed for greater adoption of the yuan, and the IMF noted that central banks around the world are looking to diversify their holdings.
"A characterization of the evolution of the international reserve system in the last 20 years is thus an ongoing movement away from the dollar, a recent if still modest rise in the role of the renminbi, and changes in market liquidity, relative returns and reserve management enhancing the attractions of nontraditional reserve currencies," the IMF report said.