The findings also add a nuance to the global currency war, which in some quarters is seen as a result of the Federal Reserve’s super-easy monetary policy stance and its desire to push the USD lower. However, more importantly, they also play to the notion that the international monetary system will retreat from the world in which one currency – the USD – is the dominant reserve unit into another dominated by regional blocs with different reserve currencies.
A new paper from the Peterson Institute for International Economics finds that there is now a de facto RMB currency bloc in east Asia, with more currencies moving in tandem in a statistically significant manner with the RMB – eight out of 10 cases – than with the USD – six out of 10 – or the EUR.
Moreover, the magnitude of these co-movements is greatest for the RMB in seven cases, compared with three for the USD.
The currencies of South Korea, Indonesia, Malaysia, the Philippines, Taiwan, Singapore and Thailand now more closely track the RMB than the USD. The USD’s dominance as a reference currency in east Asia is now limited to Hong Kong – because of its peg to the US currency – Vietnam and Mongolia.
| Number of east Asian countries |
 |
| Source: Peterson Institute |
Furthermore, the RMB’s role as a reference currency is not restricted to South Asia. The study examined the movement of 52 currencies globally.
It found the RMB is now the dominant reference currency for the currencies of Chile, India and South Africa, while for Israel and Turkey it is a more important reference currency than the USD. Overall, nine currencies out of the 42 outside east Asia move in tandem with the RMB in a statistically significant manner.
Arvind Subramanian and Martin Kessler, the authors of the report, say that while it is still the case that the USD and the EUR play greater roles as reference currencies beyond their natural spheres of influence than does the RMB, that is changing in favour of the Chinese currency.
“While the rise of the RMB as a reference currency is especially prominent in east Asia, this is as much a trade phenomenon – reflecting the increasing trade presence of China – as a regional one,” they say.
“This implies, consistent with the findings about the behaviour of currencies outside east Asia, such as South Africa, Israel, Chile and India, that it is possible for the RMB bloc to extend beyond east Asia.”
They predict that the RMB could become the global reference currency by mid-2030s if trade were the sole driver, and much sooner if China were to undertake broader reforms to open up its capital account.
New world order
Some believe the world is not heading towards a new global reserve currency, but to one in which regional blocs will emerge to stand alongside the spheres of influence of the USD and the EUR.
Indeed, James Rickards, COO at JAC Capital Advisers, says one of the most important new developments in the international monetary system is the emergence of regional reserve currencies, not global reserve currencies.
He believes there will be three emerging areas: Korea, China and Japan; Russia and its periphery in Asia and eastern Europe; and the countries in the Gulf.
“There won’t be global reserve currencies, but if South Korea is willing to accept RMB and China is willing to accept KRW, and they have assets to invest in, every transaction in RMB or KRW is one not transacted in dollars,” says Rickards.
“At the margin, that is negative for the dollar.”