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Harvard economist Kenneth Rogoff believes the Chinese yuan will become a global reserve currency within five years. He argues that President Xi Jinping’s explicit call for yuan internationalization marks a turning point.
Rogoff says investors worldwide are desperate to diversify away from the US dollar, making China’s push well-timed.
China’s Path to Reserve Status
In a recent interview with the South China Morning Post, Rogoff outlined the key steps China must take. Beijing needs to open its government bond markets to foreign investors. It also needs forward markets and interest rate swaps to support international participation.
Rogoff noted that fully open capital markets are not required. The US itself maintained many restrictions on foreign investment through the 1970s. It was still the world’s dominant reserve currency during that period.
China must also build financial rails independent of the SWIFT system. Rogoff said modern blockchain technology can duplicate existing systems at much lower cost. The country’s Cross-border Interbank Payment System already serves as a foundation for this effort.
Crypto’s Role in Dollar Erosion
Rogoff also addressed how cryptocurrencies are reshaping currency competition. He estimated the global underground economy at roughly 20% of total output. That amounts to at least $20 trillion.
Cryptocurrency, particularly stablecoins, has already captured a significant share of illicit transactions. Physical cash once dominated this space. Digital assets now offer faster and harder-to-trace alternatives.
Stablecoins Face Regulatory Reckoning
However, Rogoff warned that crypto will never replace the dollar in the legal economy. Governments have more than enough regulatory power to prevent that outcome.
He criticized the US Genius Act as overly liberal in its stablecoin regulation. Stablecoins remain difficult to trace once they leave their issuer. Rogoff predicted that future rules will eventually mirror central bank digital currency requirements.
The race for currency dominance is accelerating. Both Europe and China are building independent financial systems to reduce vulnerability to US sanctions.