Mersch Says Renminbi May Challenge Dollar’s Reserve Role

China’s renminbi might one day challenge the role of the U.S. dollar as the world’s leading reserve currency, European Central Bank Executive Board member Yves Mersch said.

“Having become an important trading and payment currency, the renminbi is now taking the first steps toward establishing itself as an international investment currency,” Mersch said in a speech at Luxembourg’s Renminbi Forum yesterday. “Due to the size of China’s economy and its importance in global trade and, potentially, finance, the renminbi might ultimately come to challenge the U.S. dollar” as a leading reserve currency.

China’s Communist government has been gradually allowing the currency of the world’s second-largest economy to float more freely in recent years, while keeping strict limits on the amount of money that can flow out of the country. The renminbi became one of the top 10 currencies used for payments last year as its use in settling trade has increased.

Introducing direct trading between the euro and the renminbi at the Shanghai foreign exchange will “bring benefits for the euro area and China,” Mersch said.

The ECB and the People’s Bank of China established a currency swap agreement in October 2013 under which a maximum of 45 billion euros ($62 billion) can be made available as a backstop against possible liquidity shortfalls.

Still, the renminbi’s internationalization could have implications for global financial stability, Mersch said, adding that “authorities and investors need to prepare for a world in which the renminbi will play a much more important role.”

Chinese President Xi Jinping presented a wide-ranging program of reforms in November, including a progressive easing of the restrictions on the nation’s financial markets.

According to Mersch, “China needs to continue reforming its economy, in particular its financial sector, along a clear, well-sequenced path” if it wants to reap the benefits of its currency’s growing international role.

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