International Affairs
4 May 2018 , Volume 94, Number 3

Authors

Masanori Hasegawa

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This article examines the potential for and geopolitical implications of the renminbi (RMB) emerging as an Asian key currency. Most analysts assume that for the RMB to become a dominant international currency, China must implement full-scale financial liberalization. However, this might not hold true in Asia, even if it does on the global level. China could enhance the RMB’s role as a store of value and reduce the RMB’s weakness in liquidity. Additionally, if three conditions are met almost contemporaneously, the RMB is very likely to become a regional key currency (RKC) in Asia—even without full-scale liberalization—within the next ten to twenty years. These conditions are: moderate diplomacy by China, continuing economic growth in China and new economic distress in the United States. The potential that these conditions can all be met is not necessarily low. If the RMB did become an RKC in Asia, it would have significant geopolitical implications. It would limit the US’ use of seigniorage and US bonds to sustain its military deployment capabilities, it would weaken the US’ ability to apply financial sanctions and it would increase China’s ability to use economics strategically. These changes would undermine US prestige and increase China’s political influence, destabilizing Asian security.

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