From tailwinds to headwinds: The troubled internationalization of the renminbi

From 2009 until 2014, conditions for the use of the Chinese renminbi (RMB) as a new international reserve asset were quite favorable. The US dollar was losing luster as a store of value just as the RMB was growing in attractiveness on this front. Additionally, use of the RMB as a trade settlement currency was quickly on the rise. Taken together, these two trends helped to increase demand for assets in China’s currency among central banks. Then, the wind changed direction. The RMB suffered two years of steady depreciation in 2015 and 2016 while the dollar rebounded. The RMB’s use as a trade settlement currency also fell during that period as a slowing Chinese economy and increased RMB volatility hampered its use. As a result, the RMB’s attractiveness as a reserve currency has faded somewhat. Central bank interest in the RMB as a reserve currency is likely to slow in the near term, though the effects may endure for longer.