Here's a bold prediction to feed Western worries that power is shifting inexorably to the East: China's yuan could overtake the U.S. dollar as the world's principal reserve currency as soon as next decade. Beijing has been promoting the use of the yuan beyond its borders since 2009 to settle trade transactions. The resulting build-up of deposits in Hong Kong has spawned a thriving yuan bond market.
Internationalizing the yuan, also known as the renminbi (RMB), brings with it a host of financial and political benefits. Notably, it allows China to build up claims on the rest of the world in yuan rather than increasing exposure to foreign currencies, especially a dollar that it distrusts.
"Chinese economic dominance is more imminent and more broad-based -- encompassing output, trade, and currency -- than is currently recognized," he writes in a new book, 'Eclipse: Living in the Shadow of China's Economic Dominance'.
Using an index of country shares in the world's gross domestic product, trade and net exports of capital stretching back to 1870, Subramanian calculates China is already on the cusp of overtaking the United States as the world's leading economy. On conservative assumptions, it will soon carve out an unassailable lead.
"By 2030, this dominance could resemble that of the United States in the 1970s and the United Kingdom around 1870. And this economic dominance will in turn elevate the renminbi to premier reserve currency status much sooner than currently expected," he writes.
In promoting the yuan's use overseas, China's leaders are seizing an opportunity to gain a foothold in Asia at the expense of the United States, Europe and Japan, all weakened by the global financial crisis, Garcia-Herrero said.
Subramanian duly laces his book with caveats but nevertheless concludes that the economic world in 2030 will be unrecognizably different from what it is today as poorer, more populous countries grow faster than advanced economies.
"A key message is that the dominant West will have to start readjusting to the new reality of relative but not necessarily absolute decline," he writes. "In particular, the economic dominance and hegemony of the United States will be under challenge from a rising China."
