'Renminbi's reserve currency status good for India'

China’s economic dominance is more imminent, larger in magnitude and broader in scope than believed, noted economist Arvind Subramanian said here on Friday.

Delivering a speech at the Reserve Bank of India (RBI) headquarters on ‘Will Renminbi Eclipse the Dollar?’, the Senior Fellow at the Peterson Institute for International Economics and Centre for Global Development said he believes the lag between the dollar’s rise and dominance of the US economy, is 10 years and not 60 years as thought earlier.

Also, the Chinese currency Renminbi (RMB) will be the premier reserve currency in the next 10 years or soon thereafter. The Chinese authorities are interested in turning RMB into reserve currency because they are looking at an exit from the present growth strategy which is based on keeping the currency undervalued and the economy closed to foreign capital.

He said the internationalisation of the Chinese currency will be good for India as it will lead to upward pressure on the Yuan and the RBI should not resist pressures from within India to use, hold or denominate in RMB.

In his presentation, Subramanian said Renminbi’s internationalisation will increase China’s stake in the open multilateral system, which is also seen as a positive for India.

Subramanian’s latest book “Eclipse: Living in the Shadow of China’s Economic Dominance” was released last month. Subramanian is a columnist with Business Standard.

In his welcome speech, D Subbarao, RBI governor, highlighted the key points of the book. One of the main thesis of the book, as Subbarao pointed out, is that China will overtake America as the world’s dominant economic power sooner than people think and by 2030, China’s share of the global economic power will match America’s in the 1970s and Britain’s a century before.

“The three forces that will dictate this race to the top by China will be (a) demography, (b) convergence, which is the scope for ‘catch up’ and (c) ‘gravity’ which is a measure of the trade potential of a country.

Subbarao said the projected rise of China to the top is imminent. “The world should prepare for this through policies for reconciling China’s rise with continued openness in the global economic order.”

The RBI governor also said for any currency to become a global currency, it has to fulfill certain attributes: It must be freely convertible both on the current and capital accounts and its exchange rate must be determined by market forces of supply and demand.

“In order to enjoy the exorbitant privilege of issuing the reserve currency, the issuing country must accept the ‘exceptional responsibility’ of maintaining sufficient liquidity in the currency,” said Subbarao, while adding that the policies of the country must inspire trust and confidence.