Only 58% of global reserves are now in USD. Can the renminbi replace it?

While more reserves are now held in the renminbi, it is still less than one-fourth of the total shift away from the dollar, that too mostly by Russia

Just as old habits die hard, old faith in a currency too takes time to erode. So even though the dollar as an international reserve currency is slowly giving way to other currencies, it still rules the roost it has occupied for 50 years.

Until August 1971, the world depended on a country's gold reserves to gauge its ability to pay for imports. It wasn't that your import value could only be as much gold as you had. But gold backstopped your paper currency in some acceptable multiple.

Then the American government, being the sort of goonda it is, unilaterally announced it would no longer back its currency with gold. The old rate of $35 to a Troy ounce of gold was no longer valid. Instead, if you took 35 dollars to America, it would give you 35 dollars in return.

After a bit of harrumphing, the world accepted this. It had no choice anyway. And thus, the US dollar became the world's reserve currency, which suddenly went from the gold standard to the dollar standard.

For half a century since then, despite challenges, the dollar has been invincible. A country's economic might is still judged, amongst other things, by how many dollars its central bank holds as reserves. In January 1991, for example, when India nearly defaulted on its import bill, it had just $1.1 billion in reserves. Today it has a whisker of over $600 billion.

But things change. A recent research paper by economists at the International Monetary Fund (IMF) says there has been a global trend to switch away from dollars. As a result, globally, the share of the dollar in total reserves is down to 58 per cent, from 100 per cent two decades ago.

Obviously, not only are alternatives available— which they have always been — many countries are slowly opting for those alternatives. The IMF's research says that recently the central bank of Israel, which holds $200 billion in reserves, has announced that it will move some of this away into the Australian dollar, the Canadian dollar, the renminbi, and the yen.

The IMF working paper also says that "the reduced role of the US dollar hasn't been matched by increases in the shares of the other traditional reserve currencies: the euro, yen, and pound."

While more reserves are now held in the renminbi, it is still less than one-fourth of the total shift away from the dollar. Russia has the bulk of these renminbi reserves in the spirit of Roosi-Cheeni bhai bhai.

The paper says that the Australian dollar, the Swedish krona, the Korean won, and the Canadian dollar account for three-quarters of the shift from dollars because "these currencies combine higher returns with relatively lower volatility."

But there is a second factor, too, according to the paper: new financial technologies that "make it cheaper and easier to trade the currencies of smaller economies." However, the researchers found this to be an incomplete explanation.

So, they say the key thing is "open capital accounts and track records of sound and stable policies."

It isn't just economic weight. Transparent and predictable policies also matter a lot. In other words, the stability of the economy and policy decisions matter for international acceptance.

China may please note. It's not enough just to be big; you have to be acceptable, too. So far, it seems only Russia has found China sufficiently acceptable to hold large amounts of the renminbi on its books.

But this could change as China expands its influence in the largest trading area of the world, East Asia.