If one thing is true, it is that everything comes to an end. Before the USA became the world reserve currency, the British pound facilitated most trades. However, after WWII, the USA became the leading supplier of weapons and goods, allowing it to accumulate large amounts of gold. However, owing to the war, European countries could not return to their fundamental monetary system. As such, an agreement (Bretton Woods Agreement) came about and was signed by 44 allied nations in order to manage foreign exchange. They decided that their currencies would be pegged to the USD, which was pegged to gold. This led to countries storing their money in US treasuries. However, the pegging didn’t last long. This is because the USA's reckless behavior led governments to be concerned about the dollar's stability. They started converting their dollars to gold, but the USA couldn’t allow that. As a result, President Richard Nixon un-pegged the dollar from gold. Even after such events and periods of stagflations, recessions, and inflations, the USD miraculously is still the world reserve currency and central banks hold 59% of their reserves in USD.
However, concerns are rising again, especially security-related concerns on the overreliance on the USD. This is leading to discourse about whether it is even possible for other currencies, especially the Renminbi, to become the world reserve. To answer such a question, we must explore what is needed to be a world reserve currency and whether it is a good thing. It is hard to give a conclusive answer, but preliminarily, the currency will need to be stable and accepted by most countries. Furthermore, it needs to be widely circulated by either running a current account deficit and/or widely reinvesting overseas. Also, there must be a large market of low-risk asset market such as treasury, bonds etc., to store the currency. Lastly, the currency must be withdrawable at demand. China meets such basic requirements except for the last one.
After fulfilling these basic conditions, topped with much political and economic strategic planning, the country will start to reap the advantages of being a world reserve currency. This begins with reduced exchange rate risk as contracts will be in their own currency. This will make the countries more attractive to FDI as there is more liquidity in that currency. In addition, access to loans is more easily provided. This will help allow the country to have easy access to capital.
Although never explicitly mentioned, China seems to be striving to become the world reserve currency, especially with its many benefits. Many Chinese actions don’t primarily strive to increase the Renminbi reserves. However, they indirectly lead to that. For instance, the Belt and Road initiative, primarily financed by the Chinese Renminbi, must be paid in that way as such countries that borrow from China have Renminbi reserves. Furthermore, the war has strengthened the trade between BRICS countries. Hostile political behavior has made such countries less dependent on the USA in trade and loans. Both factors have increased China's presence in the export and financial market, making the Renminbi reserve more attractive.
Critics of the Renminbi and the possibility of its becoming a world currency love to point out how China is a currency manipulator. This is past news as it is not deemed a manipulator anymore. Furthermore, the Renminbi has been relatively more stable than the USD due to its fixed currency system making it more attractive. Another criticism is that China tends to sanction assets without any valid justification, as seen with Australia’s sanction, while the USA only imposes sanctions against terroristic behavior. However, in reality, such normative values are mere rhetoric - both countries abuse all their means for political and economic gains.
In conclusion, will the Renminbi become the world currency? Well, it ticks many conditions needed to be a world currency reserve. As such, contrary to many opinions, it's very possible.
