Friday, May 15, 2009

The Yuan As New Global Reserve Currency

Nouriel Roubini argues that in the future, the Chinese yuan (aka the renminbi) will be the new "reserve currency of the world". I made that prediction 4 years ago, and I still believe in it.

However, it will be several more years before we start seeing oil quoted in yuans instead of U.S. dollars. First of all, the Chinese must make the yuan fully convertible. Something they will likely do eventually, but it will probably not happen during the next few years. And secondly, China must overtake America in economic size, something which will take at least another decade.

But some time (not too many years) after 2020, China will establish itself as the dominant economic power. And by that time, the yuan/renminbi will probably be fully convertible- and then it will overtake the U.S. dollar as the "reserve currency of the world", just like the U.S. dollar once overtook the U.K. pound.

6 Comments:

Blogger jeppen said...

If China continues at 10% growth and USA continues at 3%, China's GDP will overtake USA's by 2026. But really, is it that likely China will be able to keep up 10% growth for the next 17 years?

11:28 PM  
Blogger mwahlman said...

I expect that China's economy will continue to expand while the US economy will continue to contract for at least the remainder of this year. Should that trend continue for a few years then this new reserve currency timeline may happen on a sooner timeline. China also has begun working to trade using yuan directly with it's significant trading partner this year, while simultainously advocating a larger role for an IMF "super currency". The demise of the dollar as the reserve currency seems to be a forgone and logical conclusion.

9:09 AM  
Blogger Ke said...

jeppen, borrowing, taxing and printing money to fund massive government expenditures and then tout it as positive GDP growth does not equate to real economic growth. The U.S. economy is contracting right now contrary to what GDP numbers indicate.

I have predicted for a while that by 2030, China will overtake the U.S.

China is already projected to be the world's largest car producer by 2010.

12:52 AM  
Blogger Lasse Pitk√§niemi said...

So, does this mean that you don't believe in the return of the gold/silver/other commodity standard? Of course you could have meant a gold/silver/etc. renminbi, but that would be quite pointless if most currencies would be based on gold...

2:42 AM  
Blogger stefankarlsson said...

Lasse, that depends on what you mean by "believe in it". I think it would be great if it happened, but I doubt seriously that it ever will.

8:55 PM  
Blogger jeppen said...

Ke, GDP is the value added during production in the country. When there is real GDP growth, there has been more real value produced.

What you argue about government expenditures, printing money and so on is not really relevant - growth is growth.

I would be glad if China overtook the US by 2030, but I don't believe they will.

7:54 PM  

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