The Cost Of China’S Rise: How A Displacement Of The Dollar’s Reserve Currency Status Would Affect The United States
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In 2009, Chinese government officials suggested the U.S. economy’s high debt level made the dollar vulnerable, and a change from the dollar to a different primary reserve currency might be needed. This thesis seeks to answer the question of whether the rising importance of the Chinese yuan will undermine the U.S. dollar’s importance globally, and how a possible change could impact the U.S. economy. The paper begins with a background section explaining what reserve currencies are, and how the mechanisms behind both reserve currencies and foreign exchange work. The second chapter includes an explanation of the current role of the U.S. dollar internationally and why reserve currency status matters. The main part of the thesis explores the strengths and weaknesses of the U.S. dollar and the Chinese yuan respectively. The effects of the dollar’s reserve currency status on the U.S. economy are analyzed using scholarly research and primary interviews conducted with portfolio managers in the U.S. and China. The author concludes that the dollar will likely not be threatened by the Chinese yuan within the next ten to twenty years. The yuan lags behind the dollar in many areas important for its candidacy as an international reserve currency. The areas where the dollar currently leads the yuan include financial market depth and transparency, usage in transactions worldwide, greater access to markets, reduced capital controls, and restrictions on capital inflows and outflows. In order for the yuan to gain a more international role, the Chinese government must allow the yuan to float freely against all other currencies, so that investors and governments can have full faith that the currency is trading at an accurate value without interference. A hypothetical displacement of the dollar’s reserve currency status would result in mixed effects on the U.S. economy by improving the potential for exporting but raising borrowing costs.