Prof. Eswar Prasad, applied economics and management — a leading expert on international finance and the Chinese economy — presented his new book Gaining Currency: The Rise of the Renminbi at a lecture Thursday.
“The rise of the Renminbi [Chinese currency] is not so strange when you consider the fact that paper currency was invented in China,” he said.
Ancient China was the first country to use paper and fiat money, according to Prasad. He added that paper currency suffered repeated failures in China since rulers often printed too much money — the first-ever example of hyperinflation.
“In the last decade, China’s economic growth has been nothing short of extraordinary, and the international influence of the Renminbi has risen significantly,” he said.
Three percent of all international trade is now settled using the Renminbi, a jump from nearly two decades ago, according to Prasad. Although the dollar and euro are still dominant, the Renminbi has made huge progress towards becoming an international currency.
However, Prasad added that there are still limitations to the RMB despite its rapid growth.
“Although China has become the second largest economy in the world, it does not have a strong financial market or an open capital account,” Prasad said. “A reserve currency that lacks these two attributes is unprecedented.”
Prasad argued that as of right now, the RMB has no hope of becoming a safe-haven currency.
“China would need an open government, democracy, rule of law, checks and balances and an independent public institution, such as the Federal Reserve, to hold the currency, ” Prasad said.
Prasad concluded his lecture by arguing that China hopes that turning the RMB into an international currency will help reform its financial market and capital account.
Direct financial reform, however, remains risky, and President Xi has categorically stated that any accompanying political reform is “off the table,” Prasad said.
“None of us should get swept up by the notion that the RMB is taking over, but it will definitely be a wild and interesting ride in the years to come,” he said. “So buckle up, hang on and thank you.”