Why Kenneth Rogoff thinks China’s yuan will be a reserve currency ‘in the next 5 years’

South China Morning Post | Kandy Wong

Harvard University economist Kenneth Rogoff projects that the Chinese yuan will achieve global reserve currency status within five years following explicit directive calls from President Xi Jinping. Investors globally are seeking avenues to diversify away from the US dollar amid growing geopolitical tensions and currency volatility. Chinese technocrats have long advocated for greater monetary independence and exchange rate flexibility against the American greenback.

However, top political leadership historically resisted currency reform to avoid disrupting rapid economic growth. Transitioning the currency does not require completely open capital markets. Instead, Beijing must broaden foreign investor access to its government bond markets and expand forward contracts and interest rate swaps. This financial broadening would enable global institutions to intermediate international transactions independently of Washington. Foreign appetite for diversification remains high. If China allows greater exchange rate fluctuations, foreign demand will rapidly absorb Chinese sovereign debt, reshaping international financial architecture.

Comment

The 2022 asset freezes targeted against the Central Bank of the Russian Federation demonstrated that reserve currency dominance functions as a potent instrument of statecraft. By expanding foreign access to onshore sovereign debt, Beijing seeks to shield Chinese financial institutions from potential secondary sanctions enforced through the SWIFT clearing network. This financial insulation alters defence economics by decoupling bilateral energy and resource trade from US dollar clearing pipelines.

An expanded international role for the yuan directly restricts the unilateral leverage of the US Office of Foreign Assets Control across vital maritime trade routes. Consequently, lower global central bank demand for US Treasury bonds will raise borrowing costs for the US Department of Defense, squeezing long-term force modernisation budgets.

Strategic Question for Discussion

Which factor will exert greater influence on central bank reserve reallocation over the next decade — the expanding reach of China's sovereign bond market or fear of secondary sanctions enforced through the SWIFT network?

The available evidence points toward fear of financial sanction enforcement through the SWIFT network as the more immediate catalyst for reserve diversification. While access to Chinese sovereign debt provides a necessary destination for capital, political motives to hedge against US Treasury sanctions currently outweigh yield considerations for many non-aligned central banks.

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