China is not yet Overtaking the U.S. Dollar in International Trade

Introduction

In recent months, there has been growing concern about the Chinese Renminbi overtaking the U.S. dollar. However, it is premature to assume that China will take over the U.S. dollar for a few reasons. International foreign exchange reserves are changing, but they are changing slowly. Secondly, China is only beginning to sign long-term partnerships with Brazil, Iran, and Russia. Conversely, the dollar is highly liquid, convertible, and traded in all major exchanges. This explains why the U.S. dollar is the most widely used FX and is present in all central bank reserves but for a minority.

This brief first uses IMF Foreign Exchange (FX) data to investigate the levels and changes in global FX reserves, followed by the partnerships that have recently emerged between China and countries worldwide. Finally, it argues why another current account and FX liberalization are required for the Chinese Renminbi to outpace the dollar in international trade invoicing.

Why do Global FX Reserves change?

Global FX reserves play an important role in international markets as a store of value, unit of account, and medium of exchange. Over the last decade, FX reserves have changed, driven by economic and geopolitical factors. The internationalization of the Chinese Renminbi and the need to decouple from the United States (U.S.) has triggered concerns that the Chinese Renminbi may be outpacing the dollar in international reserves…