In 2015, the International Monetary Fund added the renminbi to its special drawing rights basket – an international currency reserve available to member countries, alongside the US dollar, the Japanese yen, the euro and the British sterling.
The move helped lift the renminbi’s status as a reserve currency, which confers a number of benefits, including ultimately allowing China to price trade contracts in its own currency, reducing foreign exchange risk and transaction costs.
It has a long way to go to match the likes of the US dollar but there are small signs of change. At the end of 2020, the US dollar’s share of global currency reserves fell to its lowest mark in 25 years, accounting for 59% of global reserves, while the renminbi climbed to 2%.
Still, as China’s economic influence grows, many believe it could eventually replace the dollar as the world’s dominant currency.
The more immediate fear is that China could continue to devalue the its currency to offset the effect of US tariffs and maintain or increase its competitive export advantage.
China does appear to have some form when it comes to pushing the currency lower – including in 2015 when it surprised markets by allowing it to fall more than 3% over three days.
However, while significantly lowering the yuan may hurt the US, it would also hurt Chinese consumers by pushing up the price of imports and could also see a significant flow of money out of the country as investors look for more stable places to park their money. It would also undermine China’s efforts to lift the global status of the renminbi. In other words, a sharp currency devaluation could potentially be bad for both sides of the Pacific.
