Kumar David: Why Yuan Can’t Replace Dollar As The Global Currency (December 27, 2020)


December 27, 2020

author: Kumar David


Why Yuan Can’t Replace Dollar As The Global Currency

here are five fundamental reasons why the Yuan cock won’t fight nor win the battle to become the global payments and reserve currency option in the foreseeable future. They are:-

* There is nowhere near enough Yuan in circulation to lubricate all global investment and trade. Or to put it in other words; Chinese financial pockets are nowhere near deep enough to meet global needs.

* The Yuan is not freely convertible, either due to restrictions or because some jurisdictions are not in a position to process Yun transactions with adequate flexibility.

* Chinese financial markets and banks still constitute a relatively ‘closed economy’.

* The dollar’s successor will be a bastard mix of the Dollar, Gold, Euro, Yuan and SDRs – (Yen?).

China has a few useful cards up its sleeve that could tilt the balance to a degree if it decided to play hardball. A shift from the $ to Yuan could happen in the oil market if China, as the world’s largest importer, attempted to create a Yuan-denominated crude-oil market. Or if it demand payment in Yuan for its exports, which will handicap the US which doesn’t earn sufficient Yuan through exports to China to pay for imports from China. At this stage in the discussion I think it necessary to interject that China does not want to launch the Yuan as a global currency and as major alternative reserve and payments mechanism. Anyone who is witness to the currency chaos that the US may soon run into would be wary. The reserve currency status of the $ has let America pay for everything by merely printing money. This can go on for only so long as people are willing to accept it for purchases or to hold it as a reserve.  Has China been playing a long game to dethrone the $, as one of my discussants suggests? I am not sure, but for sure US sanctions on Chinese and Hong Kong leaders and attempts to undermine Chinese technology companies (Huawei most clearly) must be pushing Beijing nearer the edge.  There is evidence that China has been accumulating gold and furthermore the Chinese 10-year bond yield now is relatively high at 3% – meaning the Yuan is payments-secure.

A reserve currency should be a medium of exchange, a unit of account and also a store of value. The $ passes with flying colours on the first two counts but with a real interest rate of -2% it is failing as a store of value compared to the Yuan which offers investors a real interest rate of +1%. But the depreciation of the dollar against major currencies is a slow and uneven process. On balance and taking into account the arguments I have advanced in this column, clearly the Yuan’s day has still not dawned..



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