Can the renminbi beat the dollar for currency supremacy?

China’s planned launch of an international payment system to process cross-border yuan transactions in September will challenge the US dollar’s dominance in global trade and help Beijing build a leading role in Asian and global financial markets.

The greenback’s dominance in global trade and financial markets has begun to weaken because of the currency’s co-dependence with US military power, which is seeing structural changes.

American military power also ensures security at home and creates a safe environment that attracts foreign investment in US assets and bonds and a desire to hold the US dollar, which is accepted in most parts of the world.

But fiscal challenges and political warnings in Washington are affecting financing for US forces. That has led to pressure on the military to cut its budget, which could lead to a decline in American influence and credibility around the globe.

As a consequence, governments, businesses and individuals have started to diversify risk by holding yuan-denominated assets, which has become a rapidly emerging trend.

A strong military force is also required to ensure the country’s leading role and offer a sense of security.

It is projected that the yuan may replace the US dollar and become the main reserve currency in the world in 2020. But the continuing development of China’s military power depends on China’s economy and whether it can maintain healthy growth.

China’s defense budget stands at US$141.5 billion this year, less than a third of that of the US, but the Pentagon’s latest report on China’s military said Chinese president Xi Jinping has adjusted the country’s policies and is stressing building the economy and the armed forces at the same pace.

Although China’s slower economic growth will affect the modernization of Chinese forces and subsequently the yuan’s ability to challenge the greenback, a recent survey by the Center for Strategic and International Studies in Washington showed a positive outlook for the yuan’s rise.

Full article: Can the renminbi beat the dollar for currency supremacy? (Want China Times)

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