No Reservations: International Order and Demand for the Renminbi as a Reserve Currency

This study identifies 37 central banks that added China’s renminbi (RMB) to their reserve portfolio since 2010. Why do some states diversify into new reserve currencies at an early stage while most continue to take a wait-and-see approach? We argue that state preferences regarding international order influence decisions to invest in RMB. While some states support the liberal, US-led status quo, others prefer an emerging Chinese alternative order. We contend that as state preferences for international order move away from the US model (and toward China), the likelihood of diversifying reserves into RMB should increase. Thus, the decision to invest in RMB is not simply an economic choice. It is also a political act that signals and symbolizes a state’s preferences for a diminution of American global influence and support for a revised order. Employing new United Nations General Assembly (UNGA) ideal points data, we find that states with larger (smaller) ideal point distance with the United States (China) are more likely to adopt RMB as a reserve currency. Furthermore, political consideration—rather than economic concerns about transaction needs, optimal portfolio considerations, or instrumental calculations—best explains emergent demand for the RMB as a reserve currency.