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Excerpts from:
3 reasons why even China doesn’t want the yuan to replace the dollar as the world’s reserve currency
May 29, 2023, 9:07 AM MYT
- The Chinese yuan is one of the top contenders challenging the USD’s dominance as a reserve currency.
- However, Beijing may not be fully supportive of making the yuan the reserve currency of choice.
- Key challenges include Beijing’s unwillingness to open its capital accounts or to run a deficit.
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1. China doesn’t want to liberalize its currency and allow money to move freely in and out of its economy
Even though China appears keen to upset the global dominance of the US, it only wants to do so on Beijing’s terms, says Rory Green, the chief China economist at London-based consultancy TS Lombard.
The People’s Bank of China has moved cautiously over the past decade to promote greater use of yuan without disrupting financial security and it’s unlikely to upset that dynamic now, Green wrote in a note on April 28.
This stability is maintained through the use of capital controls — a grip on how much foreign money can move in and out of China’s economy, which in turn influences the foreign currency exchange rate.
Beijing’s policy has typically leaned toward having such controls, as it considers them prerequisites for an independent, sovereign monetary policy, wrote Green.
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Rather than pushing for the yuan to become the dominant global reserve currency, Beijing is likely to pursue its sphere of currency influence among countries it trades with actively. It’s likely to focus on breaking up US dollar dominance in parts of the world instead, Green told Insider.
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2. China doesn’t want to and cannot afford to run a persistent deficit like the US does
The US dollar’s position and clout as a reserve currency comes at a cost — a current account deficit for America.
That’s because there’s more global demand for US dollars than American demand for imports, which are also being paid for in the greenback.
So, the US will need to contend with ever larger amounts of deficit in order to maintain its reserve currency position. This paradox was first put forth to Congress by Yale economist Robert Triffin in 1960.
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As Reuters’ John Kemp explained in 2009, the US has been running larger budget and current account deficits than most other countries simply because it’s the issuer of the world’s principal reserve currency.
“As the global economy expanded, demand for reserve assets increased. These could only be supplied to foreigners by America running a current account deficit and issuing dollar-denominated obligations to fund it,” wrote Kemp.
While China is the world’s second-largest economy right now, it just cannot afford to run a persistent deficit like the US, said Green.
“China is politically unwilling and economically unable — barring significant structural reform — to run a sustained current account deficit and to provide sufficient supplies of RMB assets globally,” wrote Green.
3. Beijing faces many geopolitical risks, so China needs alternative assets
One key challenge for any currency taking on the US dollar as the world’s dominant reserve currency is the greenback’s dominance.
Right now, even the euro’s role is larger than the yuan.
In April, 43% of all global payments made via SWIFT were made in the US dollar, while 32% were made in the euro. Just 2.3% of the SWIFT transactions were made in the yuan.
Meanwhile, the US dollar accounted for the lion’s share, or 54%, of global foreign exchange reserves in the fourth quarter of 2022, according to data from the International Monetary Fund.
The euro accounted for 20% of the reserves, while the yuan made up just 2.5% of this stash.
This means there’s a lack of wide-ranging choices when it comes to reserve assets — which is a problem for the Chinese central bank, wrote TS Lombard’s Green.
That’s because the institution would have to hold its yuan-denominated bonds in massive amounts — similar to the US Fed, which now holds a huge amount of its assets in Treasury securities.
Given these issues, it’s unlikely for the yuan to overtake the greenback, said Green.
https://www.businessinsider.com/dedollarization-china-yuan-complete-break-from-the-usd-2023-5
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