Is China Ready to Challenge the Dollar?
October 19, 2009
Amid the fallout from the global financial crisis, much has been written about whether the United States can continue as the world's predominant economic power and whether the emerging BRIC economies, particularly China, are poised to challenge the current financial and economic architecture. In recent months, speculation has focused on the future of the U.S. dollar, largely due to comments by senior Chinese officials that have led some observers to conclude that the renminbi is set to usurp the dollar's place as the world's reserve currency.
Although such headlines make thrilling copy, Melissa Murphy and Wen Jin Yuan argue that it would be a mistake to conclude that China is ready to ditch the dollar anytime soon, let alone seek to replace the dollar with the renminbi as a reserve currency. Beijing has accumulated around 1.4 trillion in U.S. dollar reserves and is keen to avoid any precipitous decline in the dollar's value—which would in turn devalue its own holdings. But, while China is still a long way from challenging the dollar's global reserve currency status, as the largest holder of U.S. debt, Beijing is undoubtedly nervous about the prospect of a weaker dollar and is taking steps to diversify its reserves, as well as to internationalize the renminbi. There also seems little doubt that in the next decade China will emerge as a major player in the international financial system. Given the strategic geopolitical and economic implications of these developments, this report attempts to provide a clearer understanding of what is motivating Beijing's current moves, where its policy is likely headed, and the implications for the United States.