Xi Backs Renminbi Reserve Bid as Dollar Questions Multiply

In an essay published earlier this month, veteran financial strategist David Roche reports that Qiushi, the Chinese Communist Party’s ideological journal, released extracts from a previously unpublished 2024 speech by President Xi Jinping that makes Renminbi internationalisation “official policy”. Roche says the most consequential line is Xi’s directive that “China needs to build a powerful currency” that can be used widely and “attain reserve currency status”.

That Beijing saw fit to place that signal in a journal is firstly interesting in the sense, as Roche points out, that it says a lot about the balance of power in the Chinese Communist Party (CCP). Conservatives within the CCP had feared that making the currency “freely tradeable could lead to destabilisation of the domestic economy because of the volatility of global capital flows”. Party modernists wished to liberalise currency strategy in pursuit of China’s broader global strategy and appear to have won a very important internal policy battle therefore – into which far more than technical questions around currencies might be read.

The essay was forwarded to The Common Sense by our friend and veteran American financial journalist Barry Wood, who among other claims to fame reported from the streets of Soweto on the 16th of June 1976. Barry spoke at a recent Common Sense editorial seminar at which some of the conversation turned to the future of the dollar.

At The Common Sense one of the themes we have returned to on podcasts and reports is the future of the United States (US) dollar and the idea that the most important contemporary battleground between the US and China is on the question of the dollar as a dominant reserve currency. Dethrone it of that status and the US can neither print its deficit nor use US-based lending as a trade and foreign policy leverage tool to the extent it historically has. In other words, US global influence drops a whole number of pegs if the dollar is rivalled.

Roche writes that China “is engaged in a Cold War with the US”, and that to reduce exposure to “US weaponisation of China’s dollar dependence”, China needs to “dethrone the US dollar, at least partially”. Once trade “touches a dollar”, it “passes through a US bank” or a bank subject to US rules, leaving Washington with what Roche calls a “killer switch”.

He notes that the Renminbi “accounts for less than three percent of global international reserves”, and that only “25 to 27 percent” of China’s international trade is conducted in Renminbi. He contrasts China’s “14 percent of global trade” with the “two percent of international reserves and 4.5 percent of global payments [that occur in its currency]”, calling the mismatch “out of kilter” with Beijing’s geopolitical goals.

Roche also sets out what Beijing stands to gain if it succeeds. A reserve currency, he writes, brings “seigniorage”, the “exorbitant privilege” of being able to “print its own money to pay for its debts, imports and foreign investments”, while also lowering trade costs, strengthening “geopolitical leverage”, and enabling “cheaper hard and soft power projection”. In his view, those advantages would “apply in spades to China” given its “massive global economic footprint” and geopolitical network.

He warns, however, that China “does not have an open capital account, deep financial markets, or the protection afforded by the rule of law” [that would apply to the dollar] but argues some of these weaknesses might be mitigated by “creating an offshore Renminbi” and giving it “legal characteristics that provide similar protection”.

Our colleague Bheki Mahlobo has previously written on how the share of global foreign currency reserves held in dollars has fallen over the last 20 years, while China’s gold reserves have risen markedly, and the ratio of dollars to Renminbi passing through the SWIFT interbank global payment system has reduced. These are all long-term trend-line markers of the build towards reserve currency status.

The Common Sense has also reported on how the move by Western policymakers to cut Russia off from the SWIFT system after the Ukraine conflict commenced was shortsighted and allowed China to use doubts about the future reliability and access to SWIFT to advance its own interbank payment system – another necessary condition for reserve currency status.

Last week, along a related line, this newspaper reported, on the advice of our friend Rowland Brown, on how the very low yields on offer from US Treasuries had been a primary driver of dollar weakness – and had driven investors to seek alternative safe havens, a factor that would certainly have been supportive of the Chinese international Renminbi drive. The appointment of “hawk-in-dove’s-clothing” Kevin Warsh to head the US Fed may go some way to reversing at least the sentiment that was draining dollar strength where that related to real treasury yields. And it may not be out of place to view that appointment as partially a nod to Roche’s “Cold War”.

Roche suggests three consequences of Renminbi internationalisation alongside a declining dollar, namely that “US global power projection falls and China’s rises”, that the “cost of capital in the US will rise”, and that “increasing holdings of alternative assets, like gold, in international reserves seems inevitable”.