How the Yuan Could Become a Global Currency
China’s Plan to Replace the U.S. Dollar
Before the yuan can become a global currency, it must first be successful as a reserve currency. That would give China the following five benefits:https://922be94f65c1aa83a2155063d12b9a96.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html
- The yuan would be used to price more international contracts. China exports a lot of commodities that are traditionally priced in U.S. dollars. If they were priced in yuan, China would not have to worry so much about the dollar’s value.
- All central banks would have to hold yuan as part of their foreign exchange reserves. The yuan would be in higher demand. That would lower interest rates for bonds denominated in yuan.
- Chinese exporters would have lower borrowing costs.
- China would have more economic clout in relation to the United States.
- It would support President Jinping’s economic reforms.
China is working hard to make the yuan the next global currency. Although presently a reserve currency, the yuan can’t upstage the U.S. dollar unless the following scenarios happen:
- Central banks around the world choose to keep a total of at least $700 billion worth of yuan in foreign exchange reserves.
- The PBOC allows free trade of the yuan and relaxes its peg to the U.S. dollar.
- The PBOC becomes straightforward about its future intentions with the yuan.
- China’s financial markets turn transparent.
- Chinese monetary policies are perceived as stable.
- The yuan acquires the U.S. dollar’s reputation of stability, which is backed by the enormity and liquidity of U.S. Treasurys.