Here is the content of my research paper.

Since I have covered the literature

review part in the 2nd presentation, in the following presentation, I will mainly
focus on the analysis and interpretation on the 2 sided arguments. There are two
parts, including supporting factors of the dollar hegemony and the challenge from
China.

Nowadays, the global clearing system is established on single currency foundation,

the US dollar. The shock of financial crisis in 2008 has aroused global awareness
on the global clearing system stability, since reliance on single currency is
unstable and unreliable. Many countries pursue a comprehensive currency clearing
system or even replace dollar by another currency. The hegemonic status of dollar is
shaking.

Let’s start from the supporting factors first. There are 3 reasons for sustainable dollar
hegemony after the crisis. 1st lack of better alternatives, Euro zone: suffer from debt
crisis & Renminbi :not fully convertible. The other two are prompt policies response
in the core and US bank’s actions took to protect against risk. The Fed and the US
government have showed the power, ability and responsibility to stay at the global
financial core.

US dollar is the reserve currency since 1944. Reserve currency is the largest part of
foreign exchange reserve held by the government that commonly used for
international transaction. In fact, it is impossible to replace dollar within short
period. Substitution of the reverse currency involves series of policy changes,
which is very complex. Making consensus and recognizing a new suitable reserve
currency among global banking system are time consuming. Say, for instance, the
US spent many years to take over the UK. Hence, a long period is required to replace
a reserve currency.

The graph here shows the Share of US dollar in total official holdings of foreign
exchange. The proportion of US dollar has only got slightly changes and kept over
61% among 12 years, US dollar is still the reverse currency in the world. Although
there were few financial crises had broken out under the dollar hegemony, the
status of dollar remains stable. Rebuilding a new global foreign exchange
composition is complex, thus it is rare to exist.
According to the Bank for International Settlement in 2015, there is a strong path
dependency in the global financial environment. The hierarchical network exists in
the form of US in the core and other countries in the surroundings. > 70% of
countries currently place their major overseas assets in the US. Here are serval data
to support the US hegemonic power. The percentage of global bonds which priced
and transacted in terms of dollar is 45%. There are 68 countries linked or fixed with
dollar when the euro only got 27 countries. The global foreign exchange reserve has
increased by about 10 thousand billion US dollars from 2007 to 2009. Moreover,
the pie chart here indicated the Composition of Global Official Foreign Exchange
Reserve (2014Q4), US dollar has a dominant percentage of about 63%. All these
are similar to the data before crisis broken out, therefore the financial crisis did not
fluctuate the US power heavily.

Now, let’s move to the challenge from China. Although the supportive arguments
show a stable dollar hegemonic power, they are under a short term prospect. The
US cannot omit the upcoming threat from China. China has the promptest growth
among the major economies. Nowadays, many economic critics mentioned that
RMB is the most valuable and safest currency in the world.

The Chinese government has introduced different measures, including setting up

RMB offshore centers, internationalization of RMB and formation of Yuan Zone.
Nowadays, there are servals RMB offshore centers, such as Hong Kong, Singapore
and London. These centers allow investors to convert RMB into other currencies
directly. 8 new agreements has signed with the People’s Bank of China in 2014, more
offshore RMB clearing centers will be established around the world. It can increase
the liquidity of RMB.

The second one is internationalization of RMB. Using RMB to settle cross border
trade can reduce the usage of foreign currency, thus reduce the losses from exchange
settlement. A more efficient multilateral trade can be achieved. As time goes by,
RMB has transferred from ‘emerging’ to ‘business as usual’ payment currency.

The graph here shows a significant increase in the percentage of using RMB as
the world payments currency. In 2014, it became the fifth biggest payment
currency. The ranking increased from thirteen to fifth within only 23 months. The
proportion of RMB increased by 768% within two years.
Finally, it’s the formation of Yuan Zone. It is a preparation for RMB to being a world
currency. The demand of RMB will increased, thus China can raise more resources for
internal economic development. Also, it is unnecessary to keep huge amount of
foreign reserve to ensure the stable balance of payments.

The pie chart here is about the Major foreign holders of Treasury securities at the
year end Decemeber 2014. China is the largest foreign holders, which occupies
20.2%. That’s why there is a high interdependence with the US. For example, China
will suffer from huge loss if dollar devaluate sharply. Meanwhile, the US will suffer
when China dump its Treasury securities. It has reinforced the dilemma and potential
conflicts among two countries.

In addition, the figure here shows the amount of Treasury securities held by China.
Although the financial crisis broke out in 2008, China increased the holding of
Treasury securities, and there is an increasing trend in the following years. Some
experts believe that the Chinese government is trying to increase its economic
influence to the US, since the US becomes more rely on China’s fund. If the
Chinese government decided to stop buying or even dump the Treasury
securities owing to any economic or political reason, other countries may imitate.
Thus, it is harmful to the US.

Special Drawing Rights baskets is the international reserve asset allocated by IMF. In
order to supplement its member nations' official reserves and stabilize the global
financial system. After the financial crisis, there are many advocators on using
SDR basket to replace dollar to be a reserve currency. IMF members are
suggested to increase the use of SDR currency to operate their central bank gradually.
It proposed that the reserve currency should be managed by a newly-formed
global reserve bank. It believed that took over the dollar can step towards greater
stability of global economy.

Zhou Xiao Chuan, the governor of the Central Bank of China, also calling for a
new reserve currency based on SDR. (e.g. US dollar, the euro, Japanese yen and the
pound ), to enhance the currency independence. SDR basket composition reviews
once in 5 years (next time: in 2015). Many economic critics predicted that RMB
will be the new member in the SDR basket.
Li Ke Qiang, the Chinese Premier, has met the IMF managing director in Beijing on
23 March 2015, he declared that China will introduce series of measures and speed
up its financial reforming speed. For instance, improve the convertibility of RMB
on capital account and facilities for domestic individual cross-border and foreign
institutional investment. If China determines to push RMB to be an alternative
of the dollar and Euro, there are 3 targets should be achieved. They are
acceptability, convertibility and broader use in international market.

RMB Internationalization has few basic requirements, first is having sound

economic power, wide trading connections with other countries and high proportion
of international trading volume. The second requirement is stable currency, it can
enhance investors’ confidence, thus can be adopted to be global reserve and
settlement currency. In addition, there should be well-developed financial market,
which having various financial instruments and limited restrictions.

In order to improve RMB attractiveness, China needed to remove internal distortions,

such as deregulation on interest rate, having greater exchange rates flexibility and
facilitate capital account convertibility. ChenYulu, a member of the monetary policy
committee of the People's Bank of China, has suggested 3 stages for full convertibility
of RMB. The first stage is freely converted in surrounding regions and Asia to be
the second. Finally, realize the full convertibility of RMB around the world in the
third stage. However, the government should aware whether the liberalizing of
exchange rate and interest rate would get ahead of domestic conditions. For instance,
removal of interest rate ceiling may disrupt state-owned corporations and banks.
In conclusion, the sustainability of dollar hegemony is supported by few
determinants. There is lack of better alternatives. The US government and banks’
prompt actions have showed their responsibility and effort to tackle financial
crisis. The strong path dependency of the US core is hard to be change in short
period, since substitution of a reserve currency involves many policies change
and coordination. Meanwhile, although the dollar status is seems to be sound
statistically, the upcoming threat from China is noticeable. It is facilitated by
progressing international role of RMB and economic reform. In order to push RMB
to be the new reserve currency and limit the harmful risks towards China itself,
the central government required to improve its openness and strengthen the
financial market gradually.

The contest between the sustainability of US hegemony and upcoming threat from
RMB is unable to complete in short term. It is a long process for RMB development
path, since it required global market involvement. RMB should be widely-held as a
reserve currency in global economy. Series of policy changes are involve and it’s time
consuming to make consensus for a new suitable reserve currency.
Whether the RMB can catch up US dollar is depending on how the US to sustain
its hegemonic power and China’s reformation progress.