August 4, 2017
Eswar Prasad at an IMF conference (photo: Staff/IMF)
As China’s economy catches up in size with that of the United States, some economists predict that the renminbi will soon challenge the dollar’s dominance in international finance.
But in this podcast
, Cornell University’s Eswar Prasad says there are limits to how far China’s currency can go without undertaking significant domestic reforms.
Prasad, a former IMF economist himself, was invited to IMF headquarters in Washington, DC to talk about his new book, Gaining Currency: The Rise of the Renminbi, on the relevance of the Chinese renminbi in today’s global economy.
The renminbi—created in 1949 when the People’s Republic of China was formed—didn't really play much of a big role in international finance until a few years ago, Prasad says. And in this podcast, he describes the renminbi's addition last year to the IMF's Special Drawing Right
basket of major currencies as remarkable, given China's capital account remains relatively closed and its financial markets underdeveloped.
“One could argue—and some have,” Prasad says, “that the renminbi does not meet the traditional prerequisites of a reserve currency, but it has become a reserve currency, and one that is playing a big role in international financial markets,” Prasad says.
Prasad says China’s desire to have the renminbi take its place on the international stage would require a lot of heavy lifting including developing domestic financial markets and institutions, an independent central bank, and the rule of law.
“For many pro-reform-minded policymakers in China, the notion of the renminbi becoming a major global currency is not an end in itself, but it serves a very useful purpose in providing a framework for getting around opposition to domestic reforms.”
On whether the renminbi could challenge the US dollar on international currency dominance, Prasad says, “If China plays its cards right, it could become a significant international payments currency—perhaps even a significant reserve currency—but it’s highly unlikely to be a safe haven currency that challenges the dollar’s dominance.”