Is China Ready to Challenge the Dollar?

Introduction to the report: Is China Ready to Challenge the Dollar? Internationalization of the Renminbi and Its Implications for the United States

Introduction

Melissa E. Murphy, Fellow, CSIS Freeman Chair in China Studies

Discussant

Prof. Pieter Bottelier, Senior Adjunct Professor of China Studies, SAIS

Tim Adams, former Under Secretary of Treasury for International Affairs and Managing Director of the Lindsey Group

Moderated by

Charles W. Freeman III, Chairholder, CSIS Freeman Chair in China Studies

Amid the fallout from the global financial crisis, much has been written about whether the United States can continue as the world's predominant economic power and whether the emerging BRIC economies, particularly China, are poised to challenge the current financial and economic architecture. In recent months, speculation has focused on the future of the U.S. dollar, largely due to comments by senior Chinese officials that have led some observers to conclude that the renminbi is set to usurp the dollar's place as the world's reserve currency.

Although such headlines make thrilling copy, in a new CSIS Freeman Chair report Melissa Murphy and Wen Jin Yuan argue that it would be a mistake to conclude that China is ready to ditch the dollar anytime soon, let alone seek to supplant the dollar with the renminbi as a reserve currency. Beijing has accumulated around 1.4 trillion in U.S. dollar reserves and is keen to avoid any precipitous decline in the dollar's value—which would in turn devalue its own holdings. But, while China is still a long way from challenging the dollar's global reserve currency status, as the largest holder of U.S. debt, Beijing is undoubtedly nervous about the prospect of a weaker dollar and is taking steps to diversify its reserves, as well as to internationalize the renminbi. There also seems little doubt that in the next decade China will continue to emerge as a major player in the international financial system. Given the strategic geopolitical and economic implications of these developments, the report attempts to provide a clearer understanding of what is motivating Beijing's current moves, where its policy is likely headed, and the implications for the United States.