“To many minds here in China the U.S. dollar’s time is almost up,” wrote Stephen Green, an economist in the Shanghai offices of Standard Chartered, in a research note last Thursday. “The euro zone suffers from political paralysis and a too-conservative central bank, while two decades of economic stagnation and a shrinking population do the yen no favors.”
For decades, China has shielded the renminbi behind high barriers . Authorities in Beijing prevented sizable amounts of the currency from building up beyond China’s borders to allow them to control the exchange rate and tightly regulate the financial system.
By keeping the exchange rate low, China keeps its exports competitive.
But, as a result, almost all payments for China’s imports and exports, as well as international investment in China and Chinese investment abroad, are made in dollars. Smaller sums cross China’s borders as euros and yen, but seldom renminbi.
China is now starting to tear down these walls and free the renminbi — a decision driven partly by recognition of China’s rising role in the world economy and partly by disenchantment with the currencies and financial systems of the industrialized world during the current downturn.
“China definitely wants to reduce its dependence on the U.S. dollar,” said Xu Xiaonian, an economist at the China Europe International Business School. “Given the quantitative easing of the Fed and the risk of worldwide inflation, it is understandable why China would want to accelerate the convertibility of the renminbi.”
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