A higher price is paid during a protracted confrontation which a country faces as it tries to join the world superpowers. The country’s public expenditure needs to be under control as they export capital which might lead to dangerous trade deficits which could be made sustainable through the selling of bonds to the neighbor living in the west across the ocean. Also, the countries have managed to create a very high trade surplus which is easily accumulated from its neighbors since their trade is built on trade surpluses. It is unimaginable how easy a superpower’s position can be toppled over due to trade. Also, it looked impossible for the country to buy all the national bond to go and manufacture its own money in the world reserve currency since the country did as they said. The United States of America currency has for a long time been a reserve currency used by many countries to make the trade. China, a force to be reckoned have tried over the years to break the monotony that America. China has tried all methods to try to break the monotony that USA dollars have. The most notable effort that China tried to do so that it dislodges the Dollar is by buying gold in order to strengthen the base of Renminbi. Despite all the effort China does, it will not dislodge America as a reserve currency because they are many factors that hinder their progress.
Graph Showing Official Gold Reserve.
Currently, the USA and China are the greatest countries since 1918 after the declining of a pound, as a result of World War I which saw dollar taking over the Bretton Woods agreement after World War II. Recently, McKinsey, a consulting firm published a book titled; will China's Currency Replace the Dollar as the World Reserve Currency?" There are very strong arguments which have been laid supporting this proposition since ( Zhang, 2011) . First, the American trade deficit seems to be overwhelming, and its demography shift is worsening the situation. Secondly, America has had more recurring trade deficits for many years, now as stated by its world currency reserve while the Chinese Central bank is still accumulating reserve due to its trade activities. The bank of China has resorted to increasing its reservoir by mining and purchasing gold so that to strengthen its currency so that it can qualify as a reserve currency ( Dodson, 2011) . There is no strong monetary policy by The Federal Reserve thus threatening inflation since the dollar is weakening. Also, America’s foreign debt is huge and increasing thus inflation is the only way to settle this debt. Finally, the American financial system is greatly hurt by consumers and subprime crisis.
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There are more counterarguments to how the Chinese dominance is impossible; first, the Chinese capital markets are required to be more transparent and have liquidity for investors even to consider using the Renminbi in the world reserves bank which still seems impossible. Transparency and independence of the Federal Reserve Bank in the US adds credibility to the value of the currency. The regular meetings of the Federal Reserve Bank are publicly known, and the discussions from the meeting are released afterward. The policy shift by the Fed are conservative, slow, and steady and indicated in advance ( Zhang, 2011) . Although the US government borrow money to finance operation, it does not print money to pay government bills. There is not this level of transparency in China, although the Renminbi currently trades on the open market, China has a long history of manipulating the value for political purposes and making policy changes overnight unannounced. This does not install confidence.
Also, the Chinese are still under communist dictatorship hence their fiscal and monetary philosophies would not work amongst the democratic market forces thus it creates a strong and uncertain element ( Amadeo, n.d.) . The economy in China is large and prosperous. However, policy changes that are made by a very few key members of the Politburo of the Communist Party of China can make significant policy and economic changed, such as turning on and off fiscal spending on infrastructure and growth projected or deciding to devalue the currency ( Reid, 2017) . Further once every ten years the leadership changes sometimes resulting in quite different policies. In the US due to the process of checks and balances, the change of a single official on a two year four year or 6-year cycle may influence the direction of policy but does not completely change policy overnight. Some of the government continues in place, but also no single person, not even the president can change policy alone it is a bipartisan, bicameral three-branch process ( Durden, n.d.) .
Additionally, China had introduced the limit number of children one should have hence created a democratic time bomb. Then China’s economic growth depends on export on low level added value and having control over exchange rate thus making their economy unbalanced causing consumerism ( W., & C, 2016) . Most of all, China is facing a social instability since they appear to have two countries; one which is industrialized and developed areas and the other one is the rural and developing areas which might cause economic consequences ( Durden, n.d.) .
Value of largest bill denomination has ensured the US currency remains a reserve currency. Both currencies have $100 or 100¥, but currently, USD is worth between 6 and seven times more, or if you needed a shoe box of the bill to transport or pay for an expensive item, you would need 6.5 shoe boxes of Renmibi. This could easily be fixed, though it seems like China is currently trying to prevent the flight of wealth from the country so this may not be in their current best interest ( Reid, 2017) .
Inflation experience and government policy Play an important role in ensuring USA currency remains as a reserve currency. The US has a long history of targeting 2% inflation and although this goal is never precisely experienced visible effort is made to keep inflation near this range. China does not have as well stated policies or transparency around inflation and has been willing to accept higher inflation rates, further complicating the risk of holding Renminbi for the transaction ( Reinhart, nd) .
Finally, the American economy solely depends on innovation and competition creativity for general production which is quite safe as compared to china’s which if medium competition is cut there relevance would be low ( W., & C, 2016) . Nearly 50 percent of the top 100 world manufacturing countries are found in the United States of America; this enables America to trade with other countries using its currency ( Wilson, n.d.) .
The process of removing pound from the world reserve happened for over 40 years from 1870 to 1945. It states that for Yuan to take over as the reserve currency they need to handle many things properly while the Americans need to make very poor financial decisions. The above-presented reason the dollar will continue being the world reserve currency and many other reasons that make the dollar strong, including the problems facing euro rocking Greece’s financial crisis. Whatever happens to the SDR, the Renminbi will not become an important reserve currency at any time over the next few decades. While many in Beijing may not understand the costs to the issuing country associated with significant foreign purchases of its currency for central bank reserves, they nonetheless exist and are significant. In spite of explicit policies to increase Renmibi holdings among foreign central banks – much ballyhooed but of limited value – Beijing’s overall economic policies implicitly make this impossible. If foreign central banks acquire significant amounts of Renminbi denominated bonds, China’s economic rebalancing will become far more difficult because either Beijing’s debt burden will grow even faster than it currently is growing, or its unemployment will be higher. In fact countries like China have put into place policies that require a hegemonic reserve role for the US dollar for many more years for them to be successful.
References
Zhang, G. P. (2011). The Chinese Yuan: Internationalization and Financial Products in China. John Wiley & Sons.
Dodson, B. (2011). China Inside Out: 10 Irreversible Trends Reshaping China and Its Relationship with the World. John Wiley & Sons.
Amadeo, K. (n.d.). Will the Yuan Replace the Dollar as a Global Currency? Retrieved March 25, 2018, from: https://www.thebalance.com/yuan-reserve-currency-to-global-currency-3970465
Reid, D. (2017, October 11). Three reasons the world could turn its back on the US dollar. Retrieved March 25, 2018, from https://www.cnbc.com/2017/10/11/the-us-dollar-may-be-at-risk-as-the-global-reserve-currency.html
Durden, T. (n.d.). Why The Chinese Yuan Won't Be The World's Reserve Currency. Retrieved March 25, 2018, from https://www.zerohedge.com/news/2017-05-22/why-chinese-yuan-wont-be-worlds-reserve-currency
Reinhart, C. M., International Financial System, & Harvard Kennedy School of Government. (n.d.). No currency can compete: Here's why the US dollar still rules. Retrieved March 25, 2018, from https://www.weforum.org/agenda/2017/03/why-the-dollar-still-rules
Wilson, W. (n.d.). Washington, China, and the Rise of the Renminbi: Are the Dollar's Days as the Global Reserve Currency Numbered? Retrieved March 25, 2018, from https://www.heritage.org/asia/report/washington-china-and-the-rise-the-renminbi-are-the-dollars-days-the-global-reserve
W., & C. (2016, June 03). China's Yuan as a Reserve Currency: Boon or Bane for the Dollar? Retrieved March 25, 2018, from
https://www.rand.org/blog/2016/06/chinas-yuan-as-a-reserve-currency-boon-or-bane-for.html
