China’s drive in international markets to replace the dollar and become the reserve currency globally has a lot to do with their strategic plans. It’s not just about pure economics. There is a fascinating piece in Germany’s Der Spiegel which spells out their efforts in detail. As the article points out,

Years ago, Hu and the Politburo attended secret lectures in which Chinese professors explained the history of the rise and fall of major powers. During these sessions, the Chinese leaders realized that no modern country has ever become a superpower without a reserve currency.

The challenge for China is that to become the global reserve currency, they have to give up essential control of their currency and allow it to be freely exchange into another. Beijing is basically using a complicated system of foreign currency controls to prevent that from happening. However, they are slowly starting to allow Chinese businesses to conduct their affairs overseas with the yuan. In December, 67,400 Chinese export firms were granted permits to do business abroad in yuan. Before that, only 365 companies had permission to do so.

But there is also the question of whether the world would really want the Chinese yuan as the reserve currency. After all, their economic system is not transparent. What is the size of the Chinese budget? Are numbers for the state owned enterprises accurate? No one seems to precisely know. Even more important, being the reserve currency does afford someone certain benefits, and allows you to muscle other countries when necessary.

But could it happen by default? Could the world be forced to adopt the Chinese currency as the reserve currency? It should not surprise us that a rising China would seek to become the dominant global power. That is the nature of power politics and human beings. But the current policies of the Obama Administration seem to be geared toward further weakening the U.S. dollar. In other words, they are printing money and running up bigger deficits, all actions that will further erode confidence in the dollar.

I don’t think the world wants to change reserve currencies. But if they continue to lose confidence in the U.S. dollar, they may have no choice.