China's Trump Card

Chapter 7Foreign Reserves Go Digital

7.1 From Zhou to Carney

Mark Carney, governor of the Bank of England, commented on the international monetary system at the Jackson Hole Symposium on August 23, 2019:¹

Transitions between global reserve currencies are rare events given the strong complementarities between the international functions of money, which serve to reinforce the position of the dominant currency. And the most likely candidate for true reserve currency status, the Renminbi (RMB), has a long way to go before it is ready to assume the mantle.

Mr. Carney's comment is a fair assessment of the state of global currency affairs. When the global financial crisis (GFC) hit the world a decade ago, governor of the People's Bank of China (PBOC), Zhou Xiaochuan, expressed a deep concern about the inherent weaknesses brought by the dollar-based international monetary system. A decade is over. The global position of the US dollar remains untouched despite a series of quantitative easing by the Fed. Even after two decades since its inception, the euro still has a sizeable gap against the dollar position in the global foreign reserve system. Almost no central bank pegs their currency with the Japanese yen. Only 1.9% of SWIFT global payments were in the Chinese yuan in December 2019, falling from the peak of 2.3% in 2015.

Mr. Carney offered a more important piece of insight, “History teaches that the transition to a new global reserve currency may not proceed smoothly…. Technology ...