Systemic Strengths, Domestic Deficiencies: The Renminbi’s Future as a Reserve Currency

Abstract

Will China’s currency, the renminbi (RMB), become a major international reserve currency that rivals the US dollar in the next decade? This article argues that this is unlikely for domestic political and economic reasons. China has some important systemic advantages that other recent challengers to the dollar have lacked, such as a large economy, a major role in the international trading system and substantial military capabilities. However, China’s domestic political system poses an important barrier to the internationalization of its currency. Chinese political institutions and financial policies reduce the attractiveness of the RMB as a reserve currency. Strong opposition to financial reform from Chinese interest groups has blocked reforms that would enhance the RMB’s attractiveness, and is likely to prevent substantial liberalizing reform in the future. Moreover, changes in China’s political economy during the Xi Jinping era (2012–present) have exacerbated these domestic deficiencies. Due to these various domestic political obstacles, the RMB is unlikely to emerge as a top reserve currency in the next ten years.