According to Ray Dalio, China’s growing dominance in the global economy will put the yuan a lot closer to becoming a reserve currency, while the digital yuan will become significantly more competitive than the digital dollar.
The founder of the largest hedge fund in the world, Bridgewater Associates, expects China’s yuan will become the world’s top reserve currency a lot sooner than anticipated. In an interview with CNBC, the billionaire investor said that an increased number of financial transactions will be denominated in the yuan, especially with China being the largest trading economy in the world. “I think you’re going to see the renminbi become a more significant, a strong currency, stable currency, more attractive-returning currency, and also a more widely used currency … in the years ahead.”
As of current, the US dollar holds the top spot as the world’s reserve currency, with a share of almost 60%, as per data published by the International Monetary Fund (IMF). Conversely, the Chinese yuan’s share sits at around 2%, following the euro, Japanese yen, and British pound. However, according to Dalio, the yuan share could increase to approximately 10% to 15% over the next five to ten years. “I think incrementally it will happen faster probably than most people expect,” he said. “A lot has to do not just with what China does. It has to do with what the dollar does.”
The US dollar has been on a depreciating trend, and is slated for a second consecutive month of losses against a basket of currencies. On Monday, the greenback dropped to a three-year low relative to the yuan, as global investors seek safer assets given China’s strong economic recovery from the Covid-19 crisis. The offshore yuan was trading at just above 6.37 per dollar, the strongest level since May 2018.
In the meantime, China is inching closer to the launch of its digital yuan, following more than six years of research and development. America, on the other hand, has only recently begun exploring the potential concept of a digital version of the dollar. The Federal Reserve is slated to publish a discussion paper on the subject later this summer. In the interview, Dalio said that he does anticipate the US will eventually issue a digital dollar, and “it will certainly be viable.” However, it will most likely not the be the most competitive one, as its value would incrementally diminish given the country’s rising debt levels.
Indeed, the digital yuan will become more competitive with respect to pricing and return, and could become a “viable alternative” to investors in the event that it is accepted internationally. “I think we’re going to enter a world in which people will be thinking which currency, and the ones that have the best fundamentals will be the ones that will be most competitive and that’ll be threatening to countries,” he added.
Information for this briefing was found via the CNBC and the IMF. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.