The Chinese renminbi (RNB) is set to become the global reserve currency in the next 10 years or so, given the country?s strong demographics and increasing convergence, according to a leading expert.
Delivering a lecture on the rising importance of the Chinese currency, at the Reserve Bank of India (RBI) on Friday, Arvind Subramanian, senior fellow, Peterson Institute for International Economics, said China?s economic dominance was more imminent, larger in magnitude and broader in scope than currently believed.
?The current open economic system will likely survive China?s dominance, but the world needs multilateralism as insurance,? he said. The internationalisation of the RMB, Subramanian observed, would be good for India. ?The RBI should not resist pressures from within India to hold, use and denominate in RMB,? he said, adding that there was likely to be upward pressure on the Chinese currency, which again would be good both for India?s central bank and India.
Moreover, the internationalisation of the RMB would increase China?s role in the open multilateral system, which would be beneficial to India. He felt that any deepening of trade relations with China would be to India’s benefit since it would create forces that would help minimise tensions. ?I would welcome Chinese investments into India,? said Subramanian, adding, ?When Asian trade becomes predominantly China-centred, there may not be a need for it to be denominated in dollars.?
Subramanian pointed out that China was emerging as the world?s biggest creditor and added that, over the past couple of years, the Chinese authorities had been taking steps to internationalise the RMB. The fact that the Chinese authorities had not changed their stance on their currency, despite its undervaluation, which had been detrimental to its trade competitors, had established the fact that China was now a dominant player in the world economy.
While it was possible that the Chinese economy may go through a rough patch, Subramanian believes that it would take off again, clocking an average growth of between 6-6.5% in the medium-term, way above the average 2%-2.5% growth expected in the US.
He also felt that a currency was eligible to be a global reserve currency if it was sufficiently liquid.
In his welcome address, RBI governor Duvvuri Subbarao wondered whether China?s growth engine could maintain its momentum and the so-called ?Chinese model? of export thrust, domestic investment binge and suppressed domestic consumption was sustainable, especially in a large, heterogeneous country with a population of over 1.5. billion.
Subbarao also asked whether a country could continue to invest 50% of its GDP year-on-year without hitting against immense overcapacity, diminishing returns and a staggering non-performing loan problem.