ITHACA – Scarcely a week passes without news about the ascendance of China’s currency, the renminbi. But China has a long way to go before its currency can rival – let alone displace – the US dollar as the dominant global reserve currency.
To be sure, China already plays a significant role in international trade and finance, with major financial centers like London and Frankfurt eagerly lining up for renminbi business. Recent speculation that China’s economy may soon be as large as America’s has boosted this interest further, causing many to believe – whether ruefully or gleefully – that the renminbi will soon dominate.
Moreover, the Chinese authorities have launched a raft of reforms aimed at opening the economy and making it more market-oriented, and have announced plans to liberalize interest and exchange rates and continue to ease restrictions on cross-border capital flows. All of this will strengthen the renminbi’s claim to reserve-currency status.
But China is missing one crucial ingredient: the world’s trust. To achieve currency dominance, China needs more than economic and military might; it requires a broader and more credible set of public and political institutions. And it is here that the US shines – at least relatively speaking.