LONDON Feb 8 The dollar will remain the world's dominant reserve currency and is likely to strengthen over time as the U.S. balance of payments improves, according to a senior Chinese central banker.
Jin Zhongxia, head of the research institute of the People's Bank of China, also said he saw great potential for the yuan to develop as an international currency as China's economy becomes more open and competitive.
Jin made his comments in a personal capacity in an article for the Official Monetary and Financial Institutions Forum (OMFIF), a London think tank, which distributed it on Friday.
"For the foreseeable future, we can speak of the global currency system as a framework of '1+4'. The dollar will continue to be the super reserve currency, supplemented by four smaller reserve currencies: the euro and the British pound in Europe, and the Japanese yen and the Chinese renminbi in Asia," Jin wrote.
He said the dollar's dominance was rooted in U.S. economic, financial and military power. The United States also enjoys the existence of a de-facto dollar zone, where the greenback functions as a major reserve asset and international transaction currency.
Moreover, because the dollar's exchange rate is not fixed to most other currencies and so can be adjusted if necessary, the dollar zone has much greater resilience to economic shocks than the euro area.
The dependence of dollar-zone members on the U.S. cross-border payments systems also means most countries have little choice but to use the dollar, he argued.
"The dollar zone looks much more loosely connected, but in reality it is more coherent than the euro area, despite the official commitment of the euro member states to that currency," Jin wrote.
DOLLAR'S BRIGHTER FUTURE
Given that the dollar's depreciation over the past few years has helped U.S. exports, the currency will tend to stabilise and even recover in the medium term, the PBOC research head said.
"Furthermore, increased domestic energy production will lead to an improvement in the U.S. balance of payments and a strengthening of the dollar in future," he wrote.
China does not disclose the composition of its $3.3 trillion in foreign exchange reserves, which the PBOC manages, but academics assume about two-thirds are invested in dollar assets.
Jin said the euro crisis had demonstrated the currency's structural weakness. But the sheer size of the 17-country bloc's economy and financial markets, together with Europe's advanced science and technology base, will maintain the euro's status as the No.2 global reserve currency, he said.
Sterling will continue to be important because of London's prominence as a financial centre, while the yen is likely to remain Asia's leading international currency for the next decade, Jin said.
He cited the openness of Japan's financial markets and the convertibility of the yen on the capital account.
"Yen settlement accounts for 30-40 percent of Japan's total foreign trade, a level that China will take years to catch up,' Jin wrote.
He said the pace of yuan internationalisation will depend to some extent not on how much renminbi China exports offshore but rather by the size, openness and competitiveness of the country's economy.
The yuan has great potential as an international currency and a multi-polar currency system, with a role for the yuan, can contribute to global economic stability, Jin said.
"But we must bear in mind that the cross-border usage of the renminbi is aimed, mainly, at dealing with some problems in the Chinese economy," he added.
In particular, internationalisation can reduce China's currency mismatch so that a more flexible exchange rate adjustment will not generate unexpected shocks to the real economy, and any external imbalances can be corrected in a timely and effective manner, Jin said. (Editing by Jeremy Gaunt.)