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The Irresistible Rise of the Renminbi

BEIJING China is making a big push to encourage greater international use of its currency, the renminbi. It has an agreement with Brazil to facilitate use of the two countries’ currencies in bilateral trade transactions. It has signed renminbi swap agreements with Argentina, Belarus, Hong Kong, Indonesia, South Korea, and Malaysia. Last summer, it expanded renminbi settlement agreements between Hong Kong and five mainland cities, and authorized HSBC Holdings to sell renminbi bonds in Hong Kong. Then, in September, the Chinese government issued in Hong Kong about $1 billion worth of its own renminbi-denominated bonds.

All of these initiatives are aimed at reducing dependence on the dollar both at home and abroad by encouraging importers, exporters, and investors to make more use of China’s currency. The ultimate goal is to ensure that China eventually gains the flexibility and financial prerogatives that come with being a reserve-currency country.

No one questions that the renminbi is on the rise. For the same reasons that the global economy has become more multipolar, the international monetary system will become more multipolar, with several currencies sharing reserve-currency status. And no one questions, given China’s size and growth prospects, that one day the renminbi will be an important international currency.

The question is when. Cautious observers warn that making the renminbi a true international currency will take time. Making it attractive for private and official international use will require China to build deep and liquid financial markets. This will mean the development of more reliable and transparent clearing and settlement systems. It will require a benchmark asset, a well-defined yield curve, and a critical mass of market participants. All of these dimensions of liquid markets take time to build.