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,"
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
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,"
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,'
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
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.)