Dollar Rules - For Now
Indeed, overtime, China should be able to transform into a modern market economy. And if the Chinese economy continues to grow at its current pace, the RMB will eventually become one of the important reserve currencies, just like the US dollar.
But for now, there are several factors strongly supporting the dollar. In addition to a liquid debt market, many commodities, including oil and gold, are quoted in the US currency. Roughly 88% of daily foreign exchange trades involve US dollars. One currency essentially facilitates global trade, and commodities can be priced homogeneously wherever traded.
And China, the top U.S. debtor with a massive holding of $894.8 billion in Treasury securities at the end of last December, is shifting to longer-term US treasuries and at the same time accumulating US stocks, raising its overall holdings of long-term American securities.
China's huge holdings of dollar reserves in the form of Treasury securities has become a concern for officials on both sides of the Pacific. However, the fact remains that the dollar is still the most liquid, the most stable currency, comparatively speaking. In that sense, it is unlikely for China to significantly reduce its holding of dollar assets in the foreseeable future.
Dethroned By 2050?
Most Western experts seem to agree that the prospect of a dollar replacement for a new world reserve currency is unlikely to materialize anytime soon because there is no serious alternative on the horizon.
Doubts also remain that the Chinese can challenge the greenback. Nevertheless, there seems to be more or less a consensus forming among many Western experts that the Chinese are on an unmistakable path toward challenging the dollar in a transition period of 10 to 15 years, roughly coinciding with the projections of Mr. Geng Xiao.
British economist Angus Maddison predicts that China will surpass the US by 2015. Drawing historic parallels of the last switch in reserve currency (from pound sterling to the US dollar) would imply the Chinese renminbi may be expected to replace the US dollar as a reserve currency around 2050, the mid-21st century.
Dollar Demise by A Greece-Like Crisis?
Meanwhile, even though the debt crisis of troubled southern European nations have taken hold of headlines lately, Moody's and its peers have expressed concerns about the financial health in Japan, UK and the U.S., mostly centered around debt and debt service in these larger nations.
For instance, interest paid on U.S. Treasury debt has been soaring the last two years and is expected to reach over $700 billion a year by the end of the decade. The U.S.'s ratio of total debt to GDP is likely to exceed 90% this year, making it more indebted even than Spain and Portugal.
While the US has been enjoying the reserve currency status, this is by no means assured for the future. For now, investors are seeking refuge in the U.S. Treasury market. However, a broken-down political system, the debt and the deficit inevitably could sink America into a Greece-like crisis, nudging the dollar's demise sooner, rather than later.
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