Yuan as a reserve currency: Likely prospects & possible implications

— "Rising US indebtedness combined with China’s rising economic and financial prowess have led some analysts to forecast the decline of the dollar and the rise of the yuan as the dominant reserve currency. While the macro-conditions such as economic size and trade openess will soon be in place, China will need to make the yuan convertible, create deep and liquid domestic bond markets and improve the rule of law. However, even then, network externalities, political obstacles and peer competitors do not make it a foregone conclusion that the yuan will emerge as the dominant reserve currency."
— "It will take China 15-20 years to put in place the conditions necessary for the yuan to emerge as an important reserve currency and even longer to rival the dollar as the dominant reserve currency. The yuan is set to become one of the major reserve currencies sometime after 2030. By then, three reserve currencies (dollar, euro, yuan) are likely to co-exist, reflecting the underlying tripolar structure of the international economic system."
— "The emergence of the yuan as a reserve currency would confer moderate financial and significant non-financial benefits on China. More significantly, the decline of the dollar would impose tangible constraints on US economic and financial flexibility. In addition to rising financing costs and lower seigniorage revenues, a declining dollar would lead to a hardening of the balance-of-payments constraint. This would have wider geo-political repercussions and affect the political standing of the US in the world."
DeutscheBank Research Briefing 20100716

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