What Needs to Happen for the Renminbi to Seriously Compete With the Dollar

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, dollar strength, dollar dominance, conversation is not going away.

Tracy Alloway (0:22)

No, I mean, it's never really gone away.

That was our intro for the last episode we did on this topic, which is, it seems like every couple of years, you get this resurgence about, oh, the end of the dollar, the dollar's gonna lose its exorbitant privilege. I remember my dad sending me articles about like, oh, Iraq is invoicing oil in euros, like in 1998 or something. Lots of conspiracy theories around that one. But I will say, we had that conversation with Paul McNamara. It was a really good overview of some of the talk that's happening right now and why certain countries, specifically emerging markets like China, might want to get away from the dollar. But I feel like there's more to say.

Joe Weisenthal (1:06)

All right, I'm gonna make a confession, which is that in all of these conversations, there are certain things that people say, and I just sort of nod my head like, mm-hmm, mm-hmm, that's right, that's right. But I don't totally get them. And one of them, and it's not even so much about the dollar per se, but about dollar alternatives.

And the big one is like, well, the renminbi cannot be a real dollar alternative until China runs a current account deficit. And I go, mm-hmm, that's right, that's right. But beyond that, I actually do not totally get what that means or what actual constraint China's trade position with the rest of the world means for the future of renminbi internationalization.

Tracy Alloway (1:41)

Well, I think the way I would frame it is one thing we hear is that there isn't a viable alternative to the dollar. There are no other currencies slash country economies that are at the level of the US's that could possibly replace the dollar.

And so I think we need to talk about why that is and what exactly that means. What does it mean? So I get the idea that, okay, maybe a country doesn't have enough financial assets for savers to buy, to put their excess money in. I get that. But what does it mean that it's not a viable alternative?

Joe Weisenthal (2:14)

Right, and I guess the question is like, okay, but what would it take?

Tracy Alloway (2:16)

Yeah.

Joe Weisenthal (2:17)

Right? It's like, I guess we can sort of agree this basic premise. Maybe there's some impulse for some countries to move away from the dollar.

Also, there are no real alternatives at this point, but maybe at one point there will be. But actually, what would it take for another currency, maybe the renminbi, maybe the euro, to actually become a meaningful global reserve currency?

Tracy Alloway (2:37)

No, if China woke up tomorrow and put this at the top of its agenda, I don't think it's going to. But what would that sort of 10-step plan actually look like?

Joe Weisenthal (2:46)

That's a great way to sort of frame the conversation. What would it actually look like? So we're gonna sort of be having part two to our recent conversation with Paul. Actually, a long time, a friend of Paul's, so maybe a similar, different perspective, but sort of like follow on of what would it take for some other currency to be a meaningful currency. Meaningful global reserve currency.

I'm very excited. We're gonna be speaking with Karthik Sankaran, a true FX veteran, recently at Corpay. He's been at Eurasia Group, multiple banks, an avid maker of dad jokes and puns on Twitter.

Tracy Alloway (3:17)

And he used to actually cover Paul when he was trading, right?

Joe Weisenthal (3:21)

So a perfect guest for this conversation in many respects. And someone who I feel like I've wanted to have on the show for like years and is like in my mind an Odd Lots guest, even though he hasn't been on the show before, Karthik Sankaran. Thank you so much for finally joining us here.

Karthik Sankaran (3:36)

Thank you very much for having me. It's an absolute pleasure to be here, an honor.

Joe Weisenthal (3:39)

What does that mean? Actually before, I want to get to the alternatives. Just before we do though, real quickly, I mean, you listened to a recent episode with your longtime friend and colleague, Paul McNamara, in which he said there is some global impulse for countries to stop using dollars, but there really aren't many alternatives. Do you basically agree with that premise?

Karthik Sankaran (4:00)

Yeah, I mean, there are, I'd say two things about that. One is, I think going to replacement, and that's how this usually gets framed as replacement. I think that's silly. And the way I think about it is, would it make sense to see creeping regional displacement rather than replacement? And I think that's a possibility. And I would argue that the euro has already done that to some extent, not just in the euro area, but also in Central and Eastern Europe. And I remember when I started my career, if you wanted to trade this lot, this lot, you traded dollar Polish. And if someone asked for a price in March lot, you traded through the legs. Now it's the other way around. And if someone asked for a price in dollar Polish, you trade euro Polish and euro dollars. So it's taken a long time, but I think that's the regional displacement idea.