THIS REMARKABLE resilience is hardly a credit to American economic or financial management. Nor is it a vote of confidence in the country’s economic strength or its financial health. Nor does it detract from China’s growing economic or trade stature, or those of other economies. Rather, it stems simply from the recognition that, despite America’s relative decline and the relative gains of others, no other currency comes close to the dollar’s credentials for the position of global reserve.

Consider the list of potential contenders. The incapacity of the ruble is evident. The pound sterling has some positive attributes, including an issuer with the requisite political stability and rule of law. Britain possesses sufficiently large and well-developed financial markets as well. But the pound loses out on other fronts. The British economy is too small to support a reserve currency, as is the reach of its trade, its diplomacy and its military. Tokyo’s yen is no contender either. Though Japan’s economy probably is sufficiently large, as is its trade, and its financial markets are close to adequate, its lack of dynamism raises questions about the yen’s ongoing backing from the production of goods and services. Tokyo’s lack of diplomatic and military stature raises additional questions about its ability to secure its and the yen’s interests. Besides, Japan has always resisted such a role for its yen, even when it looked like a world-beating economy. The country’s heavy dependence on exports has always led it to rely on a cheap yen to give its goods and services attractive pricing on global markets. Accordingly, Tokyo has chronically feared the yen appreciation that would naturally accompany reserve status and the increased demand for yen it would engender.

The euro has much to recommend it. The euro zone lives under the rule of law. The euro remains more widely held, in central banks and elsewhere, than any currency except the dollar. Its financial markets are large and well developed enough for the role. They rival dollar-based markets in scope, if not quite in absolute size or levels of activity. Outside finance, the euro zone’s economy and the reach of its trade also bear comparison to the United States. Europe’s financial crisis, however, presents a major obstacle, raising crucial questions about the currency as a secure store of value. To be sure, the euro’s foreign-exchange value remains relatively stable, remarkably so under the circumstances. The crisis, however, poses deeper questions about whether the common currency will even survive and, if it does, how many countries will continue to use it. Until such issues are resolved, the euro as a global reserve is a dead letter, and the depth and extent of the crisis suggest that such a resolution will take a long time indeed.

China’s yuan, despite the headlines, faces even greater impediments. Of course, the country’s economy is large and dynamic enough. It is significantly larger than any alternative except the euro zone. The reach of its trade is disproportionally greater, already approaching that of the United States. But there are serious questions about political stability and certainly about the rule of law. Nor can China’s diplomacy or its military claim a global reach. Though China has assumed a higher profile in East Asia, even a bullying one, it seldom ventures out of its region. When it does, much like Europe, its diplomacy mostly supports trade. Apart from oil, China plays no role in the Middle East. Apart from raw materials, it plays no role in Africa or the Americas.

It is in the financial realm, however, that the yuan’s biggest failings exist. Its markets are much too closed to support a global reserve currency. Though Beijing talks a great deal these days about liberalization, it still refuses to allow foreign financial institutions to operate freely in China and continues to control financial flows into and out of the country. The yuan remains only partly convertible for financial transactions. Nor is Chinese finance nearly well developed enough. It has neither the array of financial vehicles necessary for the task nor the trading volumes to provide the requisite liquidity. As of 2013, economist Jonathan Anderson told the Wall Street Journal, China reports the equivalent of some $250 billion in financial instruments available to international traders, bankers and investors. That figure pales next to the $9 trillion equivalent of sterling-based financial instruments, the $15 trillion equivalent in yen or the $29 trillion equivalent in euros. And it is less than 0.5 percent of the $56 trillion in dollar-based instruments available. It speaks volumes that the yuan’s oldest and best-developed trading hub in Shanghai recently boasted that it can now trade yuan directly into eleven other currencies. That is progress, but a reserve currency needs to give traders the ability to move into and out of every other currency in the world in enough locations to keep markets liquid around the clock.

 

CHINA MAY not even want global reserve status for its yuan. To be sure, Beijing can see the immediate benefits of a more internationalized currency. It can also see the potential benefits from a further elevation into premier reserve status. But it is well aware that reserve status also carries disadvantages that would burden China unduly at this stage in its development. It would, after all, require open financial markets and hurt Chinese export potential by adding significantly to the foreign-exchange value of the yuan. Rather than seeking to displace the dollar, it could well be that China and many of the other countries that have recently attacked the dollar’s dominance simply want those initial benefits of internationalization that the dollar’s preeminence has heretofore denied them. They can wait for the next step to premier reserve status, if they intend to reach it at all.

An international profile for a currency, even well short of global reserve status, does certainly have appeal. At the very least, the government involved gets prestige that it would not otherwise have, something with great attractions for the self-conscious lot in Beijing and especially for postcolonial emerging economies. It is noteworthy in this regard that the BRICS economies (Brazil, Russia, India, China and South Africa), when they established their bank in competition with the IMF, explicitly referred to their frustration, even anger, over their exclusion from the fund’s decision-making apparatus. One negotiator noted at the time of the announcement that, by some accountings, the BRICS economies combined are almost as large as those of the United States and the European Union, but they have far fewer votes at the IMF. Beyond prestige and influence, a currency’s international presence and overseas holdings also offer an appealing flexibility to macroeconomic policy, particularly monetary policy, by blunting any unwanted immediate effects of policy changes on trade conditions.

Internationalization makes trade cheaper and less cumbersome as well. When a country’s importers and exporters can trade in their own currency, they avoid the risk of adverse foreign-exchange moves during the deal. Contracts in dollars expose Chinese exporters, for instance, to foreign-exchange shifts that could bring down the yuan value of their contracted dollar payments relative to their yuan-based domestic production costs. They can, of course, hedge against such risk by buying yuan futures against the expected dollar payments. But such financial maneuvering has a cost, as does the need to convert into and out of dollars. It could well be that all the bilateral agreements to trade away from the dollar are less about unseating the dollar and more about simply making business cheaper and easier to transact while perhaps gaining some prestige and policy flexibility in the process.

These nations, especially China, are no doubt also sensitive to the additional advantages of moving up from internationalization to reserve status. They can see that the dollar’s dominant reserve status allows the United States to buy many more goods and services from the rest of the world than it sells. The willingness of foreigners to hold the global reserve allows Washington to make up the difference effectively with paper. Because these foreign dollar holdings typically find their way into U.S. Treasury bonds, the dollar’s reserve status allows the U.S. government to issue more bonds and get more credit from the rest of the world than it otherwise could. It was the recognition of these ways in which the United States could live beyond its means that prompted Valéry Giscard d’Estaing in the 1960s to describe the country as possessing an “exorbitant privilege.” Governments in China, Russia and elsewhere cannot help but covet such advantages. But China’s leaders in particular are well aware of those problems that would also accompany reserve status.

 

DESPITE ALL of the dollar’s relative advantages and all the disadvantages of its competitors, there is still every reason to expect that in the fullness of time some other currency will seriously challenge the dollar’s status. In that distant future—perhaps when China has reoriented its economy, developed and opened its financial markets, assumed a truly global diplomatic and military presence, and learned to live under the rule of law—it may be the yuan. It may be the euro, when the euro zone has finally remedied its financial failings and overcome the other impediments standing in its way. Or it may be a currency not even considered today. Whichever currency rises to the challenge, that day is clearly still a long way off. Even then, if the last change of global reserve is any indication, the supplanting will take still longer, during which time the dollar will likely share reserve status with its ultimate replacement, as the pound sterling did with the dollar in the early twentieth century. For now, the dollar reigns supreme.