Academic journal article Journal of Global Business and Technology

The Rise of the Renminbi from Convertible toward Reserve Currency Status as a Result of the China-Us Trade Relationship

Academic journal article Journal of Global Business and Technology

The Rise of the Renminbi from Convertible toward Reserve Currency Status as a Result of the China-Us Trade Relationship

Article excerpt

INTRODUCTION

Although the US Dollar is not the only reserve currency as of spring 2014, its role in international finance in both commercial and Central Banks operations continues to be dominant relative to other actual reserve currencies such as the Euro, the Japanese Yen and the Swiss Franc (Chinn, Frankel, 2008).

Given that the magnitude of the economy of the People's Republic of China is second only to that of the United States and that the PRC is among the first five trading nations of the world, even if the trade volumes of the 28 countries of the European Union are aggregated into one numerical entity, it is somewhat surprising that the PRC's currency, the Renminbi, is not only not a reserve currency but it is not even a fully convertible fiat issue (Gao, 2013).

Nonetheless, over the past seven years from 2007 to 2014, the Renminbi has been moving in the direction of greater acceptability and greater convertibility.

Should the Renminbi be welcomed into the category of convertible currencies? That depends in part on US-China economic relations and on how China would be using its strengthened currency:

Would China allow the Renminbi to function as a normal instrument of commercial exchange and a store of value or would China use the strengthened Renminbi as a tool for the mercantilist exploitation of its trading partners (Mathews, 2006)?

The Dollar has become a leading reserve currency after World War I in conjunction with the British Pound, often referred to as the Sterling. Toward the end of World War II, with the establishment of a world financial system within the framework of the Bretton Woods Agreement, the Dollar emerged as the supreme reserve currency (Gardner, 2008).

Two major works were published recently that subjected to in-depth examinations the merits of the supremacy role assigned to the Dollar. The study by Barry Eichengreen was published with the accusatory title of Exorbitant Privilege: the Rise and Fall of the Dollar and the Future of the International Monetary System (Eichengreen, 2011). The study by Esward Prasad had a similarly ominous title, The Dollar Trap (Prasad, 2013).

Eichengreen offers a historical analysis of the benefits that accrued and continue to accrue to the United States by virtue of its position of being able to create a universally acceptable currency. Simply by printing its own currency, the US can create wealth and riches for itself. Given that most other countries cannot do this or can print universally acceptable currencies only in proportionately smaller quantities, provides the United States the exorbitant privilege.

It should be observed that the existence of an important privilege is clear. The Unites States, unlike many countries, does not need to first succeed in producing goods and services for export and collect accounts receivables from its customers in order to earn the funds with which it can purchase essential and desirable imports. The US can place purchase-orders and pay for delivered goods and services by printing money or issuing other debt instruments. This is a process which involves the acquisition of real goods and services in exchange for financial instruments which eventually may or may not need to be converted into real goods or tangible assets.

Moreover, the US can incur substantial amounts and even vast quantities of debt owed to foreigners, because ultimately it can discharge the debt obligations through increasing its own money supply by printing money.

Eichengreen then considers not only the privilege but also the possible decline associated with the reserve currency status of the US Dollar. (Eichengreen, 2011)

In the more recently published "The Dollar Trap", Prasad (2012) delivers a comprehensive historical analysis of the role, performance, and impacts of the Dollar. Somewhat similarly to Eichengreen's work, his study also addresses the possible decline associated with the reserve currency status of the US Dollar. …

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