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China and the Reserve Currency Question

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  • Ryan, John

Abstract

China’s concern about its U.S. Dollar reserves is being amplified by the low returns of some of China’ investments in the U.S. which leads to a broader concern about how the current reserve system basically entails China lending to the U.S. at very low interest rates. A two-currency reserve system would potentially be even more unstable than the existing one, because of speculation moves in and out of the U.S. Dollar and the Euro depending on their return, increasing volatility. U.S. Policymakers have started to realize that large external deficits, the dominance of the dollar, and the large capital inflows that necessarily accompany deficits and currency dominance are no longer in the U.S. national interest. The U.S. has to consider initiatives put forward over the past year by China and others to begin a serious discussion of reforming the international monetary system. This chapter will examine four scenarios regarding the global currency regime of the future and the Chinese influence in this most important policy arena. It will focus on the U.S. Dollar decline as the Reserve Currency, on the Euro gaining strength slowly in a turbulent world, on the potential of the Renminbi to become a Reserve Currency, and on the future of the Super-Sovereign Reserve Currency, the IMF’s Special Drawing Rights (SDRs). Before that it will examine the role of the Renminbi in the Asian Financial Crisis in 1997 and its role in the global financial markets at that time and lessons learnt from the crisis. The crisis had significant macro-level effects, including sharp reductions in values of currencies, stock markets, and other asset prices of several Asian countries.

Suggested Citation

  • Ryan, John, 2009. "China and the Reserve Currency Question," MPRA Paper 18218, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:18218
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    File URL: https://mpra.ub.uni-muenchen.de/18218/1/MPRA_paper_18218.pdf
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    References listed on IDEAS

    as
    1. Menzie Chinn & Jeffrey A. Frankel, 2007. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 283-338 National Bureau of Economic Research, Inc.
    2. Lee Branstetter & Nicholas Lardy, 2006. "China's Embrace of Globalization," NBER Working Papers 12373, National Bureau of Economic Research, Inc.
    3. Alicia Garcia-Herrero & Tuuli Koivu, 2008. "China'S Exchange Rate Policy And Asian Trade," Economie Internationale, CEPII research center, issue 116, pages 53-92.
    4. Gabriele Galati & Philip Wooldridge, 2009. "The euro as a reserve currency: a challenge to the pre-eminence of the US dollar?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-23.
    5. Adam S. Posen, 2008. "Why the Euro will Not Rival the Dollar," International Finance, Wiley Blackwell, vol. 11(1), pages 75-100, May.
    6. Christian Thimann, 2008. "Global Roles of Currencies," International Finance, Wiley Blackwell, vol. 11(3), pages 211-245, December.
    7. Jean Pisani-Ferry & Adam Posen, . "The euro at ten: the next global currency?," Books, Bruegel, number 303.
    8. Zhaoyong Zhang, 1996. "The Exchange Value of the Renminbi and China's Balance of Trade: An Emp irical Study," NBER Working Papers 5771, National Bureau of Economic Research, Inc.
    9. Menzie Chinn & Jeffrey Frankel, 2008. "Why the Euro Will Rival the Dollar," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 55(3), pages 255-278, September.
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    More about this item

    Keywords

    CHINA; U.S.; EUROZONE; DOLLAR; EURO; SPECIAL DRAWING RIGHTS; RENMINBI;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • A10 - General Economics and Teaching - - General Economics - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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