It’s perhaps the most tantalizing question in economics: When will China’s yuan replace the dollar?
Chinese President Hu Jintao delighted yuan bulls recently by calling the dollar-dominated world a “product of the past.” Oddly, though, his signature legacy will be solidifying the U.S. currency’s place at the center of the global financial system for many years, if not for decades, to come.
Two big priorities belie China’s hope to scrap the dollar. One, China’s ever-growing appetite for it. Two, China is facing a potentially turbulent year and stability matters more than anything else to its leaders. Both will conspire in unexpected ways to preserve the dollar’s dominance.
Many of China’s challenges could be addressed with a stronger yuan. Given China’s obsession with control, a big move isn’t likely. A safer bet is that China’s dollar purchases will accelerate to boost the all-important export industries. That patronage is the dollar’s best hope for stability.
“The only plausible scenario for a dollar crash is one in which we bring it upon ourselves,” economist Barry Eichengreen writes in his latest book, “Exorbitant Privilege.” Granted, the United States seems to be doing plenty to achieve just that with its massive borrowings and near-zero interest rates. Yet China’s demand for dollars gives the United States a get-out-of-crisis-free card.