The leading global economic power USA is tottering under the weight of a virus.

The great crisis was contained with a historic rescue program.

But the national debt will grow by a good 20 percentage points to around 130 percent of the gross domestic product (GDP) in 2020.

The central bank, the Fed, bought most of the newly issued government bonds.

President-Elect Joe Biden already believes that further spending programs are necessary.

The author: Prof. Dr.

Gunther Schnabl teaches economic policy and international economic relations at the University of Leipzig

Source: private


This is different in China: the virus seems to have long been under control there.

The economy has started up again and the national debt has only risen 10 percentage points to 66 percent of GDP.

The Peoples Bank of China's balance sheet is stable, while the government is celebrating its claim to leadership in East Asia with the RCEP free trade agreement.

Will China's currency, the renminbi, soon challenge the dollar as the reserve currency?

The dollar became the anchor and reserve currency

There are historical reasons that the dollar is currently the undisputed global reserve currency.

The new world currency order, the Bretton Woods system, was built on it in 1944.

The dollar got a fixed parity with gold and served as an anchor currency.


Because the central banks on the periphery needed dollars to peg their currencies to the dollar, it also became a reserve currency.

If the US Federal Reserve expanded the money supply by purchasing government bonds, the dollar came under devaluation pressure.

The other central banks had to buy dollars to stabilize the exchange rate.

In this way, they helped finance US state spending.

French President Charles de Gaulle lamented the "exorbitant privilege".

When the US financed the Vietnam War via the money press, dollars accumulated in central banks around the world, causing inflation to rise.

The Deutsche Bundesbank therefore finally stopped buying dollars and allowed the Deutsche Mark to appreciate.

Other countries followed suit, and the system collapsed.


In Europe, the stable mark developed into an anchor and reserve currency.

When France saw the coveted reserve currency status lost to Germany, it pushed for the introduction of the euro.

Most Asian currencies, however, remained loyal to the dollar.

When China opened up to international transactions in 1994, it tied the renminbi tightly to the dollar.

Since then, an informal dollar standard has grown in East Asia.

This is based on the fact that many East and Southeast Asian countries (with the exception of Japan) are stabilizing their exchange rate against the dollar.

This not only brings security for trade with the USA, but also creates a high degree of exchange rate stability within the region.

This is important for the intensive division of labor, which the latest free trade agreement will further deepen.

Often times, Southeast Asian companies are the suppliers for Chinese companies exporting to the US and Europe.

Renminbi is solid as a rock

China has a central role in East Asia for three reasons.

First, the economy is big and stable.

Second, in contrast to Japan, China has grown rapidly since the 1990s.

Third, the renminbi's tight dollar peg has stabilized the region.

While the neighboring currencies crashed in the Asian crisis (1997/98), China's adherence to the dollar made a significant contribution to the region's recovery.

Even in the corona crisis, the renminbi is solid as a rock.


The fact that it has not yet become a key currency - at least regionally - is also due to the fact that China's capital markets are strictly regulated and sealed off by capital controls.

Free and highly developed capital markets are behind an international currency.

Hardly any international investor would entrust their reserves to China's current financial system.

But now there are increasing signs that the “reconstruction” of the USA as well as the expensive rescue of the climate should be financed largely with the help of the Fed.

That will further undermine the stability of the dollar.

The financial repression that accompanies a persistently loose monetary policy will weaken the US financial markets.

This is the chance for the renminbi, as the Deutsche Bundesbank demonstrated in the 1970s.

It held the reins of monetary policy tighter than the Fed, so that the DM appreciated and gained international importance.

At the end of the 1970s, the USA had to issue bonds in DM and Swiss francs, which symbolized the fragile world currency status of the dollar.

Europe had long since decoupled from the dollar and the European central banks were no longer buying American government bonds.

The rise of the renminbi

China's dependence on the dollar has long been a thorn in the side.

The US wars and the rescue packages for Wall Street were co-financed only reluctantly.

The renminbi has appreciated against the dollar since the outbreak of the corona crisis.

If the appreciation expectations persist over a longer period of time, there would be an incentive for the East Asian countries to exchange their large dollar reserves for renminbi.

The establishment of the renminbi as a regional reserve and anchor currency could finally gain momentum.

The high indebtedness of Chinese companies of 160 percent of GDP remains an Achilles heel.

Most recently, defaults by large companies have caused a stir.


If the renminbi moves up to become the regional reserve currency, the support for these companies could be financed with government bonds bought by neighboring countries.

China could then take a big chunk off the US “unlimited credit line”.

Prof. Dr.

Gunther Schnabl teaches economic policy and international economic relations at the University of Leipzig.