Chinese Yuan as Reserve Currency: A Curse to the Dollar?

General

The International Monetary Fund designated the Chinese yuan, also known as the renminbi (RMB), or “people’s currency,” in November as an IMF-recognized reserve currency, thus holding the yuan.

(including previously designated holdings of the dollar, euro, yen and sterling) giving IMF members access to Special Drawing Rights (SDRs) from the fund in the event of financial distress.

This is a small step. But it is important in making the yuan an important reserve currency of china for central banks. China can take steps to increase the yuan’s chances of sharing. The role of the US dollar will be as the main reserve currency:

Creating full convertibility of the Yuan for financial (capital) transactions (Chinese currency is fully convertible for trade only)

Exchange rate for the Yuan

Set the exchange rate for the Yuan. (in dollar terms or a weighted basket of currencies) or set a small range over which the rate can fluctuate based on market conditions; and

Pledged to use China’s central bank reserves to support the yuan’s exchange rate. At the same time, it reaffirmed its intention to limit such intervention to rare and particularly stressful situations.

Since the IMF designated the Yuan as an SDR-accessible currency, the chances of the Yuan becoming a major reserve currency have actually decreased, in part due to the increased volatility that typically agitates global financial markets.

But it is also the result of misguided Chinese policy. This was the result of the easing of monetary policy that stimulated the rise in the Shenzhen and Shanghai stock markets. While the authorities have urged ‘Circuit breakers’ to suspend subsequent trading in stock markets.

Future global financial architecture

However, when thinking about the future global financial architecture It is not too early to consider the following longer-term question: If the yuan were to share the role of the main global reserve currency with the dollar? What will be the relationship between the two currencies? Are they in conflict? Will the relationship between the two currencies conflict? supplement?

Chinese economy

The quick, easy-to-understand answer picks the opposite side of the spectrum. Underlying this intuition is the idea that the dollar’s role as a primary reserve currency will increase global demand for the dollar. and increases the valuation of the dollar relative to other currencies. Sharing this role with the yuan will result in a decline in the dollar’s value. and may harm U.S. interests.

But when viewed through a wider lens The combined role of the yuan could both complement and compete with the dollar. To answer this question It begins by addressing both the size and fragility of the Chinese economy.

Of course, the Chinese economy is very large. At market exchange rates, GDP is $11.4 trillion. Annual trade is $2.2 trillion. But cross-border financial transactions Total transactions (relative to trade transactions) amounted to just over $600 billion in 2014-15.

China’s GDP accounts

When compared with American statistics, The difference is also striking: China’s GDP accounts for more than 60 percent of the United States’ GDP. By considering the exchange rate in the market. In terms of purchasing power parity, the GDP of the United States is 90 percent of the GDP of the United States.

China’s trading volume is more than 40 percent of US trading volume. Meanwhile, Yuan-denominated transactions account for less than 5 percent of dollar-denominated transactions.

Global markets

The yuan’s small value in international finance reflects the limited confidence that global markets have in the stability of China’s financial institutions.

Including the central bank, four state banks (all of the world’s five largest banks), 2,000 commercial banks, and two stocks, markets in Shenzhen and China.

Shanghai and its huge, growing ‘shadow’ banking sector But there is a loophole. Increasing market confidence in the yuan is not only difficult. It would bring a level of transparency that is relatively unknown in China.

China’s role as a world currency

China’s role as a world currency Frequent and prolonged requests for help from the United States or China “Aggressive monetary policy” (AMP as defined below) often has serious destabilizing, disruptive and unintended consequences.

AMP operating countries

Both within AMP operating countries and in other (“third”) countries, if the dollar and the yuan share the role of dominant global reserve currency, (rather than the current near-monopoly with the dollar).

Use of AMP by one country is likely to shift the preferences of third countries to another. More stable coins and thus discourage the frequency and disruptive effects of AMP, establishing a system in which two reserve currencies compete to influence global decisions regarding reserve holdings.

(Especially competing reserve currencies that are less sensitive to AMP) could therefore lead to greater financial stability than current currencies denominated in dollars. Dominated system

AMP means nominal short-term interest rates are close to zero according to official statement – negative real rates. This is because even low inflation rates exceed nominal interest rates near zero.

Alice in Wonderland situation

The result is an Alice in Wonderland situation where lenders pay borrowers to take on debt. AMP also offers long-term interest rate relief through “quantitative easing” through the purchase of large amounts of commercial and other official debt

Proponents of AMP, inspired by the Federal Reserve System’s legislative authority in the Federal Reserve Reform Act of 1977, to promote full employment and maintain stable prices.

Despite this goal, AMP in the United States caused severe disruption in the United States and global capital markets between 2008 and 2015.

Policy Of Savings

The policy has punished and discouraged savings. and bank lending channels to smart and nimble market players (such as hedge funds private equity funds and an active pension fund) rather than investing in a long-term business, AMP has reduced registered unemployment in the United States.

Not by expanding employment But by causing working people to withdraw more from the labor market. As a result, the share of the eligible population still working in the labor market is the lowest in thirty years.

The easing of US monetary policy between 2008 and 2015 has caused increased volatility in the exchange rates of 8 prominent countries in Asia (Korea, Pakistan, Malaysia, Indonesia, India, Philippines, Singapore and Thailand).

It’s fair to say that fluctuating exchange rates reflect other factors. Many things besides official monetary policy: climate, national and international security conditions.

Technological advances and Failures

technological advances (e.g. Microsoft, Apple, Amazon, Facebook) or technological failures (e.g. Enron, thalidomide, misvalued exchanges, derivatives), the spillover effect of AMP is a destabilizing factor. more Which sometimes has more destabilizing effects than other factors.

Conclusion

As a result, third countries often dislike and deplore AMP because its disruptive effects undermine their efforts to pursue consistent policies in their own countries. Therefore, if policymakers in countries that use reserve currencies of one central bank is considered less likely to resort to AMP than another country’s currency.

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