When billionaire investor Ray Dalio recently predicted that the Chinese renminbi will become a global reserve currency, the world took notice. It is a prediction that the Chinese government has encouraged through its own efforts. The question now is whether the coming “Year of the Ox” will bring the decisive shifts needed to position the RMB to fulfill policymakers’ ambition.

Like a beauty pageant, the contest for reserve-currency status is one of relative attractiveness. International traders and investors must decide which among the currencies available to them is most convenient to use, is supported by the strongest financial system, and — perhaps most important — enjoys the backing of a trustworthy sovereign. What is new today is that both of the world’s major sovereigns also seem to be competing to reduce their own trustworthiness.

Relative attractiveness is difficult to quantify. But underlying this concept is one factor that can be measured precisely: the size of the issuing country’s economy. As the economist Paul Krugman explained in a 1984 paper, “the currency of a country which is important in world markets will be a better candidate for an international money than that of a smaller country”. In other words, a globally dominant economy is the “hardware” for an international reserve currency.

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