Not much success. The dollar is going to be the lingua franca of the world-system for a long time to come.

Article Hegemonic Currencies During the Crisis: The Dollar Versus th...

@David ... it would seem a foregone conclusion that the US dollars will remain a hegemonic currency in the market. So size or volume is not a decisive factor. in light of the fact that by mid-2015, the Chinese economy would eclipse that of the US---the probability that the world will adopt a new lingua franca is quite small?

A couple of years ago I was discussing with a friend of mine about the possibility of RMB to become the main exchange currency for international trade. He claimed some of the same things posed in the question, that is: the importance of the Chinese activity in global GDP, as well as the weakness of the US dollar and the amount of the US debt (a good proportion in Chinese hands). He postulated that the Renmimbi was sooner than later to become a reference and exchange currency for trade. I may be wrong but still don´t buy this idea. Yes, the USD weakened so much in the last decade that it gave some basis to believe it was going to be substituted by some other more reliable currency. The crisis at the Euro zone immediately banned the possibility for the EU currency to take its place. The same happened with the Yen, while the British pound does not have the conditions for that. Thus, many people forecasted that the RMB would take the place of hegemonic currency. But it does not work just like that. For a currency to internationalize in that way, it needs more than just an important share at the international trade. You need not only a strong currency but also a reliable one, emitted by a reliable Central Bank. Trust is a condition that takes time to build. The RMB and the Chinese economy are still “young” for the sake of it. It is possible that some people would take the Chinese RMB as a reserve currency but I don’t think this will generalize. Nations will continue trading preferably in dollars because the world still believes in the structural strengths of the US economy and the reliability of the Fed, no matter the huge deficit, the weakness of the dollar, and so on. In summary, I think that the entire world still believe that the US dollar is the most trustable mean of exchanging goods and services. Even with all the problems faced in the past years, it will continue being the international currency.

@Bruno ..... thank you for the contribution. Most informative and constructive. So the dragon is drowsy, no matter if it has been awaken. Much smoke but no fire. UNCLE SAM will continue to carry the torch and trust of the world for the time being, it seems. Cheers.

@Paul, it's not a question of trust, it's a question of power.

@Paul and @David,

The problem is also geopolitic. To become a real international currency it requires to have an outstanding reputation not only as economic weapon but also as political interlocutor in the international backstage and scene. China does not have such relevant role either in the diplomacy environment or in the international organizations (leadership, management boards etc.). 

@Ting, Indeed, Also, having the world's largest military capacity helps...

@Ting ... good point. Economic power must be accompanied by political power (military might as well).

@David ... when China (one of the largest US bond holders in the market) purchase US bond, it does so: is it because it finds the US government reliable in redeeming that bonds when it is due, or is it because the US bond is worth it says on the paper because of the US power? If "power" includes both political and economic terms, then sure---power it is, you are correct.

I won't deny that military power is very important and plays its role but it is not the ulitimate factor, in my opinion. 40-50 years ago, the USSR was at the peak of its military power and the Russian ruble never was an option at that time. One may say that the USSR never played the "capitalist game" as Chine does now and it is true. But you need more than military power. We can probably say that military power is necessary but not sufficient. China's military power is big enough that the U.S. Would never engage in a conflict with this country. So, I insist, when you trade you won't exchange goods and services by rubbish. You want a mean of exchange and reserve that you're sure that will keep value. You want to play under rules that are as clear as possible. You don't want to use a currency that you are not sure tomorrow will suddenly depreciate sharply because this Govt engages in some crazy monetary policy. You want to use a currency whose behavior depend as less as possible on the mood of the Issuer. You want a reliable central bank as independent and transparent as possible (100% doesn't exist here) in charge of a strong and reliable economy. You just don't want a black box. That's why, in my mind, people still trust and will continue doing so, in the Fedral Reserve.

China is on the podium for each record statement. It is instead relegated to the bottom of the list for the dissemination of the renminbi. If the numbers will celebrate the rise, are equally merciless when certifying their marginality of the coin. China is the largest exporter and second largest importer of goods and services in the world, and yet transactions in renminbi cover only a negligible percentage of the total. Its currency is only 7th among the most used currencies, behind not only the dollar and the euro, but also the pound, the yen, the Australian and Canadian dollars. The sterility of statistics - and sometimes the trumpets of propaganda - note that in January 2013, the comparable percentage was even lower, and the location was the 13th. The substantial improvements cannot hide the analytical data more convincing: the renminbi is still on the margins of the international financial system. An irony accountant certifies: China holds nearly 4,000 billion US dollars of foreign exchange reserves, ⅔ of which are in US currency. Beijing buys dollars and Washington smiles because it does not have to grant high interest rates. To finance itself, just print with wisdom bond and currency; someone, especially in the East, will buy them.

China has moved abroad the solution of an equation inside. To internationalize its currency, the stumbling block is the largest in Beijing and regards the liberalization of the capital market. The solutions need the confidence of international investors that only the acceptance of the rules of the market can provide. Beijing however still does not feel ready to venture into a competition which does not control all the variables. Liberalize foreign exchange means that the value of the renminbi can be determined "by others", outside the control of China.

Alberto Forchielli

President of the Observatory Asia, CEO of Mandarin Capital Management SA, a member of the Advisory Committee of the China Europe International Business School in Shanghai.

I disagree concerning the importance of an independent central bank and the frame of confidence lens to analyze monetary hegemony.

Chapter Dollarization

Chapter Dollar Hegemony

China holds the bulk (estimated to be about 2/3) of its foreign-exchange reserves in U.S. Dollar-denominated assets; the rest in Euro-denominated assets. Enough said. 

I think the biggest obstacle to the development of the RMB as an international currency is the absence in China of any separation between the government and the judiciary. If you are responsible for managing a substantial amount of wealth, you simply can't afford to take the risk of leaving it in a jurisdiction in which, if there is a dispute, the outcome is likely to be determined by the interests of the government rather than the application of codified law.

Admittedly, the RMB is not the only currency which suffers from this drawback. The United States uses its dominance of international finance to pursue foreign policy objectives. But in China, there isn't even the pretence of an independent judiciary.

As long as capital market openness is at the mercy of political currents, it'll be slow going. See discussion in these papers.

http://www.ssc.wisc.edu/~mchinn/Chinn_rescurr_OER2015.pdf

Dear Bruno & David,

interesting is the question of the Central Bank. The Fed can make use of the monetary policy with the operation of the monetary base (increase in the money supply by buying bonds) to finance the deficit. So the US has bailed out the banks and have come out of the crisis.

Until recently, the European Central Bank could not buy the bonds to cover the deficit of the countries in crisis. The EU countries had only the lever of fiscal policy. To cover the deficit, the income and assets of households and businesses have been squeezed (very high levels of taxation). The latter, by reaction, have opted for the liquidity preference and have fallen into a liquidity trap. The result was the reduction of the velocity of circulation of money, and the deepening of the crisis with firm failures and higher unemployment.

Moral: it is not enough that there is a central bank, but it must have the power to expand the monetary base and then to do a real monetary policy. If a country do not have this power, they do not trigger neither investments nor consumptions and the Keynesian multiplier can not operate.

Have a good night. 

https://iems.ust.hk/publications/thought-leadership-briefs/renminbi-internationalization-the-prospects-of-chinas-yuan-as-the-next-global-currency

In a situation of growing significance and share of productive production of a given country and its sales on foreign markets, increase of significance and share of direct and capital investments, etc. on foreign markets and sale of treasury securities on foreign markets, these processes may also generate a similar increase in the significance of a given country's currency on international markets.

Greetings.

Dariusz Prokopowicz

I am not an economist, but...

True, of late, the Chinese state has been positioning itself at strategic locations (e.g. secondary airports and maritime ports in key geographic locations) and luxury industries (e.g. precious stone extraction, vanilla, cocoa), presumably, in an attempt to enter a new stage of its international expansion plans and achieve global reach, but...

I do not think that the Chinese economy (as heavily reliant on production as it is) is stable enough to provide the necessary assurances internationally.

How much of Chinese currency is actually backed up by gold reserves, or other precious commodities? What other guarantees are there in case of inflation, regime change, or a potential default?

How does the RMB relate to the CNY? Do we have correct understanding of this relationship in terms of accounting and taxation?

Many people use both terms interchangeably, but then - which other currency in the world has two names? What for?

Dominant alternative currencies are born out of a certain type of education, economic, political and legal culture, understanding and procedures, as well as past interractions of good faith.

:)

Dear Mr. Paul Louangrath,

thank you for the question, which is very important. In my opinion we should consider the Mundell-Flemming Trilemma (free flow of capital, fixed exchange rate and monetary policy) in the context of the developemnt of the Chinese economy. China will choose this option which is the best for its' economic development. The possibility to internationalize RMB is one dimension of the issue, but the rationale of such choice for the Chinese economy is another crucial factor. I think that in long term we can expect and see the success of the RMB internationalization.

It will take some time for China to be more involved in international finance. Being the workshop of the world in supplying the goods has resulted in a growing share of global GDP. Financial markets are relying on the US$ as a medium of exchange. Japan was in a similar situation in the 1980s. It takes a lot to have your currency internationalize and become a reserve currency. The benefits have also costs.