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China's Currency Isn’t Dominant Yet

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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Despite growing concerns that China's economy is in trouble, the country's currency is widely seen as a contender to oust the U.S. dollar from its dominant position in international trade. Judging from data on money transfers, it has a very long way to go.

QuickTake The People's Currency

No doubt, the Chinese currency is gaining global credibility. In November, the International Monetary Fund said that it would add the yuan to its basket of reserve currencies, bringing it into a club that includes the dollar, the euro, the British pound and the Japanese yen. The move recognized the yuan's increasing international use: According to data from SWIFT, the system though which banks send most crossborder payments, the currency accounted for 2.3 percent of transfers (both within and among countries) in November 2015, up from almost nothing five years earlier.

That said, the dollar has gained even more than the yuan. As of November, the U.S. currency accounted for 42.7 percent of the payments that SWIFT tracks, an increase of almost 11 percentage points from November 2010. The euro, meanwhile, saw its share of total payments decline by 11 percentage points, to 29.5 percent. Here's how that looks:

Exchange-rate changes alone cannot explain the dollar's gain: It was almost complete by the time the U.S. currency's value started rising in late 2014. Europe's shift to a new payment system -- transactions through which the SWIFT currency-composition data do not cover -- accounts for some of the decline in the euro. Still, the dollar's share of total payments has increased.

One possible lesson: When people decide which currency to use in crossborder contracts, they want one that will be managed in a responsible and predictable manner. Europe may have made its currency less attractive in recent years, as its leaders -- and particularly Germany -- demonstrated their willingness to risk a breakup of the euro rather than provide fiscal support to weaker members such as Greece. This is something that U.S. legislators would do well to keep in mind the next time they consider risking a government default by threatening not to raise the debt ceiling

China's economic management has also left much to be desired. The country's leaders have vacillated between freeing markets and trying to control them, while the central bank hasn’t done the best job of communicating its plans for the currency -- for example, wrong-footing markets with a surprise devaluation last year. As Bloomberg View has noted, the yuan's increasing global role will require more openness and a steadier hand.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net