Talks about the Chinese yuan becoming the next global reserve currency have been around since Robopip was just a baby cyborg. Now a recent move by the Chinese government has once again gotten economic gurus excited about the currency’s prospects of it rivaling the dollar’s reserve currency status.
When did it all start?
Speculations began a couple of years ago when Chinese policymakers expressed their concerns about the country being too vulnerable to the U.S. dollar. It held about 2 trillion USD-worth of assets acquired from Treasury purchases and exports to the U.S. Their worry was that, if the dollar weakened, China could end up with massive losses.
Many also took People’s Bank of China (PBOC) head honcho Zhou Xiaochuan’s remarks about replacing the Greenback as the international reserve currency as a sign that Chinese officials want the yuan to get the title.
And of course, it’s China’s impressive growth that pushed its global ranking in economic size higher, now second only to the U.S., that’s only fueled these talks even more..
What has China done since then?
China has taken a few baby steps to internationalize the yuan since.
For instance, I wrote in 2011 that the government implemented a trial program that allowed trade transactions to be settled using the yuan. Chinese officials also gave up of some of their control over yuan-denominated bonds in Hong Kong by letting yields be determined by market forces rather than to be dictated by the PBOC.
In Shanghai, residents also started to send their moolah abroad to invest in foreign markets, which was not previously allowed by the government.
What has gotten economic gurus excited now?
Talks about the Chinese yuan rivaling the dollar as the world’s reserve currency have once again gained momentum after a report was published earlier this week, saying that the China Development Bank (CDB) will sign an agreement that would allow its counterparts from the other BRICS countries to acquire yuan-denominated loans. In exchange, the development banks of the other BRICS nations will also give China access to loans denominated in their respective currencies.
If you remember, BRICS (composed of Brazil, Russia, India, China, and South Africa) is the clique made famous by Goldman Sachs in the early 2000’s with its prediction that they would be wealthier than most of today’s currently-developed countries by 2050.
The CDB agreement aims to improve trading relations among the countries and promote the use of the yuan as an alternative to the dollar. If Goldman Sachs is right, better trading relations among the BRICS could be reflected in their economic growth which may consequently fuel the global economy. Because of this, the deal is said to benefit not only the BRIC countries but the rest of the world as well!
A concrete step to the yuan’s journey in becoming the next global currency?
Many see the move by the Chinese government as a huge step in making the yuan fully convertible and soon, becoming an international reserve currency. You see, the CDB has been known only to hand out most of its loans in U.S. dollars.
In fact, a lot of economic gurus are so excited that they predict the yuan becoming a major reserve currency within the next ten years. Analysts at Deutsche Bank have said that we could see it account for 15% of global currency reserve holdings by 2020 and witness the dollar’s share fall from its current level of 60% to only 50% by then.
I wouldn’t hold my breath to see the yuan strip the dollar of its global reserve currency status just yet though. Well, at least not until I see the Chinese government let yuan float freely instead of giving the PBOC full control over its value. For that to happen, that means that China will have to give up its comparative advantage in having an undervalued currency, which makes its exports relatively cheaper compared to those of its counterparts.