Hyderabad, , India
Marketing, English Language, Analytical Ability
0 Comment | 13 Views | 01 Feb 13  | Shiv Mundhra
Will Chinese Yuan become the next reserve currency?
Known as ldquoDr Doomrdquo for his negative stance, Prof Roubini an economist argues that China is better placed than the US to provide a reserve currency for the 21st century because it has a large current account surplus, focused government and few of the economic worries the US faces. The Chinese Yuan is preparing to overtake the US dollar as the worldrsquos reserve currency, he warned. The international currency breaks down when the world economy heads into a crisis. This happens either because debtorrsquos doesnrsquot pay their obligations or creditors fear that they will not be repaid in sound money. Former is in the case of Euro zone crisis and the Latter is the case of the relationship between US China. So how these conditions will change the system Much discussion alarm whether China Yuan will replace US dollar as the global reserve currency. To summarize in the single sentence Yuan has the potential, but it may take 15-20 years before China strongly promote the currency. Although macro factors are in favour of China, it has to make the Yuan convertible, needs to improve the rule of law and create deep domestic bond markets. However despite such efforts, the factors like political obstacles, network externalities, and competitors may prevent Yuan to become the dominant reserve currency. It was in the case of Japan when in 1991 economists were predicting that in by 2010 Japan will overtake US as the worldrsquos largest economy. But due to the decline in the growth of household consumption and sharper global rebalancing as Japanrsquos current account surplus dropped, Japan economy remains the same size it was then. Also the relationship with the major countries like US, Japan, India, and Russia will also determine the success of Yuan. If China is unable to maintain healthy relationship with these economies, which are expected to together constitute around 60 of the world GDP in 2030 source ilookforwardto.com, the uttermost of the Yuan as the global reserve currency would be next to impossible. There are two approaches while analysing the strength in the Yuanrsquos bid for the next global reserve currency. On the one hand China has made significant efforts on economic front it is at par with the US merchandise trade and second to the US in terms of GDP. While on the other part it lacks the robust financial institutions, rule of law and Bonds convertibility as this are the important aspects for any currency to become the global reserve currency. Also China is a closed economy wherein it majorly involved in the exports it seems to be a difficult path for Yuan. It was the case during the US default when China devalue its currency by 2 knowingly that US is there major customer and this act would ultimately create more difficulties for US. More than sixty years ago, the dollar replaced the British Pound as the leading global reserve currency, as dollar reserves held by countries surpassed the Pound reserves. With the continuous fast-growing development since 1970 China has been the second largest economy in the world. Subsequently China is also making efforts to push the Yuanrsquos internationalization by diversifying its reserves, therefore the Yuan can claim the status of the global reserve currency in the coming next two decades. After the World War II US has been the number one economy in the world and one of the main trading partners for many countries, accounting for most of the global exports and imports. As China is growing its merchandise trade with many major countries, its trading partners will eventually start holding a part of their reserves in the Yuan denominated assets. The biggest bottleneck of China is its relatively shallow and illiquid domestic Bond market with limited to access to foreigner investors. Bond market is one of the major parameters while crowning the global reserve currency. This is place where the investors have fully trust on the government. Furthermore the foreign exchange and derivatives market of China is also not robust henceforth in order to establish Yuan as a global reserve currency it has to strengthen these aspects. Although China has committed to develop bond, currency and derivatives market, it has to go long way to make a bid for the global reserve currency. Although China has a good impact on political stability, it lags in the rule of law. According to the World bank China has been sluggish over the past few years on this parameter. Therefore if it doesnrsquot improve on this aspect the foreigners will be reluctant on investing onshore Yuan assets. With China following quasi pegged exchange rate and manages capital controls, it doesnrsquot seems to fulfil the conditions in reality. With high expectations it is believed that China will deliver on low inflation and exchange rate stability in case it adopts convertibility even though in steady manner, along with implementation of necessary domestic institutional reforms. This will subsequently results in the implementation of secondary reforms to ensure financial sector stability post convertibility and reduction in direct control over the financial system. As China grows big its dependence on export-led growth will reduce which will establish a flexible exchange rate regime. It can be clearly said from the above discussion that China needs strong significant Capital Derivative market and legal reforms to regulate the rule of law necessary to enable Yuan emerge as a global reserve currency. Also China has to diversify its reserves in the foreign market so as to increase its reserve in other countries as well. To bid for the global reserve currency China needs to improve their trade among other countries so as internationalize Yuan assets into other economies. It may take around 15-20 years for China to create the necessary conditions. Moreover, Chinarsquos politics will have to play a big role in the evolution of Yuan as a global reserve currency. Countries like India and Japan which do not have close political relations with China are unlikely to hold the major chunk of their foreign reserves in Yuan. Professor Roubini, of New York Universityrsquos Stern business school, believes that while such a major change is some way off, the Chinese government is laying the ground for the Yuanrsquos ascendance.

    • Social Share
      for this Blog

Porfolio And Blogs
Shiv Mundhra follows various companies, these companies and employers can view Shiv's resume.
Upload your resume to get best job opportunities.

Register free!