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Report: China's yuan to erode, not end, dollar's dominance

WASHINGTON – China’s yuan will chip away at the U.S. dollar’s dominance over the next decade but is unlikely to supplant it as the world’s top currency, says a report from a federal watchdog.

The study Thursday by the U.S.-China Economic and Security Review Commission predicts the yuan will gain ground at the expense of the Japanese yen, euro and British pound and “may slightly erode” the dollar’s status.

Written by Cornell University economist Eswar Prasad, the report predicts that China will allow its tightly controlled financial system to “become largely open within the next three to five years.” But Beijing must enact broader reforms before the yuan can join the dollar as a “safe haven” currency, sought after by investors in times of crisis, according to the study.

China has aggressively promoted the use of the yuan in global commerce. It has, for example, allowed yuan-denominated bonds to be issued in Hong Kong and permitted some banks to offer yuan deposit accounts outside China.

But the yuan still is used in fewer than 3 per cent of cross-border financial transactions, compared to nearly 44 per cent for the dollar and 29 per cent for the euro. Beijing won a symbolic victory last year when the International Monetary Fund decided to include the yuan to a basket of currencies used in the IMF’s operations.

The commission report Thursday also predicted that Chinese investment in the United States will begin to change as more Chinese households, businesses and institutional investors take advantage of growing opportunities to invest abroad. Largely because of Chinese government purchases of Treasurys, China is the biggest foreign owner of U.S. government debt. In the future, Chinese investors increasingly will sink money into U.S. stocks, real estate and businesses.

The commission was created by Congress in 2000 to monitor the national security implications of the U.S.-China economic relationship. The group publishes the report “to promote greater public understanding” but does not necessarily endorse its findings.