Global expansion of the yuan

China, as the second largest economy and the biggest export nation, is gaining more and more influence on the world market. Experts claim we could be at the edge of a revolution of the financial markets, having the yuan as the new global reserve currency.

After many discussions in our blog about the existence of a currency war, blaming especially China to devaluate its currency for competitive advantages, the article “Redback im voraus” in the Wirtschaftswoche #47 particularly caught my attention. It describes an ongoing internationalization process of China’s renminbi, or also called yuan, to reduce reliance on the dollar and even to become a global reserve currency.

And indeed a recent very interesting study from HSBC with the title “The rise of the redback – A guide to renminbi internationalization” supports this argumentation.              “If there is to be a rival to the dollar as the world’s reserve currency in the 21st century, it must surely be the Chinese renminbi”, Qu Hongbin, chief China economist at HSBC sais. He further explains, “We expect at least half China’s trade flows with emerging markets to be settled in renminbi within three to five years, making it one of the top three global trading currencies.”

China has already taken some steps to encourage cross-border trade using the yuan by signing bilateral currency swaps with other nations, as illustrated in the Wirtschaftswoche. Countries like Malaysia or Argentina (see chart) exporting goods to China can be paid in yuan and in return purchase products from China using the Chinese currency.

Moreover, the Wirtschaftswoche outlines the enormous development of an off-shore market of the yuan in Hong Kong. After the Chinese government already eased restrictions, several Chinese and foreign institutions have increasingly issued yuan-denominated bonds.

Using the yuan instead of the U.S. dollar accelerated in part by the financial crisis and the weakness of the dollar, as investors as well as companies seek less risky alternatives to hold their reserves in.

Given China’s economic and trade power, I think it will increasingly be natural for the renminbi to become a reserve currency. However, the process to liberalize the markets could take several decades. Therefore, the yuan will rather gradually develop to an international currency.

And it must also be considered, if the Chinese government continues with liberalizing its currency the yuan will probably gain in value. This in return might be discouraging for China’s exports but, on the other hand, could release the tension between China, the USA and Europe on the currency valuation issue.

All in all, if and how fast the yuan develops to a global reserve currency depends on long-term political and economic development and until there is a political reform in China there can be no freely convertible currency.

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7 Responses to Global expansion of the yuan

  1. rudi2020 says:

    Chuck Butler, President of EverBank WorldMarkets states in his blog, why China will NOT be able to position the RMB as world’s financial backbone. At least in the following two or three decades.
    In a nutshell: significance is just too low plus foreign capital inflow is still not sufficient to be the world currency.

    Let’s face it, the RMB as the world currency, replacing the US$? Can’t quite imagine this scenario because, one reason, biggest bill is 100RMB, that’s 10Euro roughly.

  2. stuerzele says:

    Nice view on China’s currency policy, considered we have been writing about the “currency war” quite a lot.

    I agree on rudi2020’s point of view on this: I don’t think that the Renminbi will become a world currency. First, of the reasoning rudi2020 already covered nicely in the comment above. Additionally, I think, the governments of the USA or Germany would do everything within their powers to prevent this. Noone wants to see China become even more powerful.

  3. bravenewloock says:

    I totally agree, and I don’t even have to look at economic indicators: A Redback as world reserve currency is geopolitically unacceptable for too many countries. Will we even see a single currency apart from the USD in this role? There are some heavy discussions about the “Globo”, a single global (exchange) currency. Even Tim Geithner had a slip of tongue speaking about an existing posssibility of a Globo. Paul Krugman however believes that a global single currency will lead into disaster. There are thrilling times ahead!

  4. Bruce Spear says:

    Nice post, question, and comments you guys! But why not try to think the “impossible”: that the US will finally have to pay its bills, and when they do, the dollar collapses:

  5. rudi2020 says:

    Thanks for your post bruce:
    It’s implications are drastic and interseting: End of USA somewhen around 2025 and China’s dominance in all kinds of science. I am a fan of China so I don’t mind. Haha.

    However, voices of USA declining and China forcening seem to be all over the web. A hot topic!
    Here we go with a recent poll how AMERICAN’S see their own future:

  6. Pingback: What’s up in 2011? | BraveNewFinance.

  7. vivipre says:

    Thank you all for sharing your opinions. I agree with you rudi2020, the Chinese currency will probably not become a reserve currency within the next 20 years but I’m not so pessimistic for its later future.

    Another quite interesting thought, as I think, is the idea of a global currency, mentioned by bravenewloock. The artile Bruce suggests, thank you for that one, even supports this concept by forecasting US bankruptcy and a future that “might lie with a global reserve currency disconnected from individual nations”.

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