The renminbi’s share will undoubtedly rise, given the size of China’s economy and with Beijing taking measures to facilitate yuan internationalisation. But the Chinese currency won’t be challenging the US dollar any time soon because, in reality, more underpins the US dollar’s global dominance than just being the currency of – at least for now – the largest economy on Earth.

That is not to deny that economic strength is a prerequisite for a dominant world currency. Indeed, the post-1945 hegemony of the US dollar derives from the United States being the only major economy that ended World War II with an undisrupted monetary system, a healthy trade surplus and a thriving industrial base that was undamaged by conflict.

Consequently, at the time, under the 1944 Bretton Woods Agreement, it seemed logical to employ the dollar to underwrite the remonetisation of the shattered European and Japanese economies.

This was achieved by setting a fixed exchange rate for the US dollar and gold, and guaranteeing full convertibility between them. With that rate fixed at US$35 for an ounce of gold, the next step was to set fixed exchange rates between the US dollar and other currencies, thus backstopping the value of those currencies.

The system rested on a gold-backed US dollar but it was sustained by a constant recycling of greenbacks as Washington, through the Marshall Plan, poured US currency into war-torn economies and the recipients used those dollars to buy US goods.

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Problems arose when, in the 1960s, the rising costs of US military involvement in Southeast Asia, and expansive domestic fiscal expenditure programmes, resulted in the United States running deficits, not surpluses.

A rising US trade deficit meant greenbacks leached into the world financial system but weren’t all being repatriated. Foreign holders of those US dollars became concerned about the sustainability of the Bretton Woods system. Some started to demand that Washington exchange dollars for physical gold at the agreed price of U$35 an ounce.

By 1971, the Nixon administration decided enough was enough. Unilaterally cancelling the direct convertibility of the US dollar to gold, Washington effectively ended the Bretton Woods agreement, ushering in the era of floating exchange rates between fiat currencies.

But that did not lead to the end of US dollar hegemony. By subsequently and deliberately making the US an attractive investment destination, Washington was able to support the greenback’s continuing dominance on the world currency scene by basically recycling other nations’ trade surpluses.

No capital controls, clear property rights enforced by an independent judiciary, attractive yields and the unmatched depth of US bond market liquidity – these conditions created an investing environment that proved irresistible to foreign investors, and continue, to this day, to keep the dollar at the epicentre of the currency markets.

China’s ‘goal is not to replace US dollar’ with the yuan

Nowhere else can currently match these conditions in their entirety. China itself bought into this narrative, recycling received US dollars back into US Treasuries for decades, and building up a huge store of foreign reserves in the process.

China has the economic clout to challenge the US but the requirements of the global financial system favour the dollar, not the renminbi. The COFER data is interesting but the US dollar’s position as the world’s dominant currency remains unassailable.

Neal Kimberley is a commentator on macroeconomics and financial markets