In the 5th century BC, the world’s reserve currency was the Greek drachma. That currency has disappeared – at least for the time being – but while transition to a new world reserve currency can take generations, it can appear to happen relatively quickly when the end-game arrives.
Although still a long way off, several developments this year show that the world is working to help China put these building blocks in place to bring its currency onto the global stage.
Throughout history, global reserve currencies have reflected global trade and economic strength. Pound sterling was the dominant reserve currency in the 19th and early 20th centuries, even though the Deutschemark and US dollar were gaining strength based on the expanding German and US Economies.
By the end of World War II the US was the dominant economic power, and the dollar officially replaced the pound as the reserve currency at Bretton Woods in 1944.
The dollar is still the world’s reserve currency today, with several strong investment currencies providing diversification (see illustration, ).
However, with continued uncertainty surrounding the long-term health of the euro, there is renewed interest in looking at other currencies that could develop into reserve status.
A recent study by the Brookings Institute concluded that the renminbi could become a reserve currency alongside, but not supplanting, the dollar within the decade on the back of the continued rise of the Chinese economy.
Meanwhile, HSBC’s chief executive Stuart Gulliver has stated that RMB will become one of the world’s three main reserve currencies within 15-20 years.
Clearly there is much work to do before that happens. According to market experts, the RMB will have to go through three phases of development to achieve its goal: trade currency, investment currency and finally reserve currency.
Steps have been taken this month to permit the development of RMB as a trade currency with the adoption of swift codes that permit clearer settlement options for investments in local currency.
London has been the most aggressive foreign booking centre as it strives to build an offshore trading hub, and it has the vocal support of the UK Exchequer.
For wealth managers and their clients these developments may lead to more investment opportunities in local currency to access China’s growth. Many private banks are already offering RMB products and services, and those that aren’t must be expected to follow suit very quickly.