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No need for China to worry about Triffin dilemma

Global Times 2015-09-21

With yuan internationalization moving forward, some scholars believe that China will at some point suffer from the same "Triffin dilemma" that the US has faced.

The Triffin dilemma - first identified by Robert Triffin, a professor of economics at Yale University - relates to difficulties in maintaining the US dollar as a global reserve currency. For the dollar to maintain its global currency status, the US must run a current account deficit in its balance of payments so that foreign nations can hold enough US dollars as foreign exchange reserves; but continuing outflows of US dollars means an increasing deficit, which then affects the confidence of the dollar holders, and undermines the dollar's international status.

Before we decide on whether yuan internationalization will also lead to a Triffin dilemma for China, we should first determine whether the yuan has been internationalized. A simple but important sign is whether the yuan is included in the IMF's Special Drawing Rights (SDR) currency basket. But another factor to bear in mind is that even if the yuan is internationalized, there should not be excessive concern about the Triffin dilemma.

First, the dilemma is mainly based on a situation facing the dominant international currency, rather than for other international currencies. For instance, of the four reserve currencies that are currently in the SDR basket, the US dollar is the dominant currency, while the euro, pound sterling and Japanese yen are merely prominent international currencies. The theoretical basis of the Triffin dilemma so far holds true only for the US dollar, and not for other currencies.

Currently, the weightings assigned to the currencies in the SDR basket are 41.9 percent for the US dollar, 37.4 percent for the euro, 11.3 percent for the pound sterling and 9.4 percent for the yen. So after the yuan is internationalized, will its status be equivalent to the dollar, euro or other international currencies? It is likely that the yuan will surpass the status of the yen and pound sterling, and could reach a status similar to that of the euro between 2030 and 2040. With regard to the yuan reaching the dollar's status, it could take half a century or longer, based on whether China's economy grows larger than that of the US.

Second, even if the yuan eventually becomes the dominant international currency, it does not necessarily mean that China will face a Triffin dilemma. Since the dilemma emerged in the 1960s, the international monetary system has undergone major changes, but the US dollar remains the world's dominant currency, and is of primary importance in the global settlement system, investment system and reserve system.

The reason for that is that the Triffin dilemma is not the only significant factor affecting the dollar's status. There are other factors of similar or even greater importance that Professor Triffin ignored.

One of these is the absence of an alternative currency. The whole world is aware of the problem that the US dollar faces, but when there is no better currency, the US dollar is the only option. The euro was once seen as a currency that could challenge the dollar, but this has not yet happened.

Another factor is a country's support strategies to maintain its currency's dominance. To protect the dollar's preeminence, the US government has adopted economic, political and security policies to clip the wings of competing currencies.

The lack of an alternative currency and US support strategies for the dollar have suppressed the Triffin dilemma and allowed the dollar to remain dominant internationally. Based on the dollar's experience, if the yuan were to replace it internationally, its position could be as solid as the dollar's is now.

The Triffin dilemma is like a "rich man's disease" for the dominant currency in the international monetary system. As the yuan is still in the process of internationalization, there is no need yet to be concerned about the dilemma. Even if the yuan does become fully internationalized, China can take various measures to ensure its stable service in the international monetary system. It would not be wise to give so much weight to the Triffin dilemma that it could be allowed to obstruct the process of the yuan's internationalization.