Kenneth Rogoff, an economist at Harvard University, believes the Chinese yuan will become the world’s reserve currency within five years. He argues that President Xi Jinping’s explicit call for the internationalization of the renminbi signals a turning point.
Rogoff said China’s efforts were well-timed, as investors around the world are eager to diversify away from the US dollar.
China’s path to reserve status
In a recent interview with the South China Morning Post, Rogoff outlined the key steps China should take. The Chinese government needs to open its government bond market to foreign investors. We also need futures markets and interest rate swaps to support international participation.
Mr. Rogoff pointed out that completely open capital markets are not necessary. The United States itself maintained many restrictions on foreign investment throughout the 1970s. During this period, it was still the world’s dominant reserve currency.
China also needs to build a financial rail independent of the SWIFT system. Rogoff said modern blockchain technology allows existing systems to be replicated at a much lower cost. The country’s cross-border interbank payment system already serves as the foundation for this effort.
The role of cryptocurrencies in dollar erosion
Rogoff also addressed how cryptocurrencies are reshaping currency competition. He estimated that the world’s underground economy accounts for about 20% of total production. The amount is at least $20 trillion.
Cryptocurrencies, particularly stablecoins, already account for a significant portion of illegal transactions. Physical cash once ruled this realm. Digital assets now offer a faster and harder-to-trace alternative.
Stablecoins face regulatory reckoning
But Rogoff warned that cryptocurrencies will never replace the dollar in the legal economy. Governments have more than sufficient regulatory power to prevent such outcomes.
He criticized the U.S. Genius Act’s stablecoin regulations as being too liberal. Stablecoins remain difficult to trace once they leave their issuer. Rogoff predicted that future rules will eventually reflect central banks’ digital currency requirements.
Competition for currency supremacy is accelerating. Both Europe and China are building independent financial systems to reduce their vulnerability to U.S. sanctions.
