Competing With The Dollar

As questions mount over the US dollar's (USD) long-term dominance, it is pertinent to examine the evolution of the Chinese renminbi (RMB) on the international stage.

Currencies rise and fall with trade, finance, and trust. In the 19th century, the sterling (GBP) reigned supreme because the British Empire dominated global commerce and exported capital at scale. London’s deep, liquid markets intermediated those flows and offered a breadth of investment alternatives. As a result, global economic actors, including central banks, held GBP to conduct business, wherever they were.

It took two world wars and a fundamental economic shift for the USD to overtake the GBP, a transition codified in Bretton Woods (1944). The USD’s ascent was powered by America’s economic dynamism, scale, open financial markets, and institutional credibility. The GBP, meanwhile, faded due to an exhausted, uncompetitive, and indebted economy subject to episodic capital controls.

China’s RMB emerged as an international currency much more recently. Following a proven post-WWII export-led economic growth model (Germany, Japan, Korea), China used a deliberately undervalued currency to pursue economic growth. This strategy transformed the nation into the world’s workshop and allowed it to build vast foreign-exchange reserves.

The question now is whether the RMB can evolve from an export engine into a store of confidence, rivalling the USD and the euro.

Data shows that the RMB has internationalized since the Great Financial Crisis but remains a niche currency. The Chinese currency sits at ~2% of central-bank holdings, far behind the USD (~60%) and EUR (~20%). It ranks 6th in payments or ~3% by value (like the CAD). In FX turnover, the RMB is on one side of ~6% of all trades only (just below the CHF).

What would it take for a currency like the RMB to position itself as a widely held international currency? First, a critical mass of economic output to ensure global availability; second, free exchangeability with minimal friction; third, a broad, liquid markets with a large variety of investment opportunities so that holders can invest the currency at will; fourth, a stable political system with robust legal protections, assuring holders that their assets as safe from arbitrary geopolitical interference; fifth, an open economy supporting global circulation.

This last point may be underappreciated. For half a century, the structural US trade deficit, seen today as an unacceptable weakness, was a powerful geopolitical tool that exported the USD (accumulated abroad and used as currency by global trading partners transacting with each other) and capitalism worldwide.

While ‘de-dollarization’ is a popular topic, a sober review of these criteria shows the immense hurdles facing the RMB’s internationalization. The road to international acceptance will be long and tortuous, if that goal is ever achieved. In the foreseeable future, gold may pose the greatest challenge to the USD.