Yuan As Currency Reserve
So far we know the US dollar as a currency reserve in various countries. Over time, currency reserves are not only US dollars. The Chinese currency, known as Renminbi or Yuan, is the latest member of the reserve currency for the International Monetary Fund (IMF).
On November 30, 2015, the IMF granted the yuan status as a reserve currency. Continued on October 1, 2016, the IMF put the yuan into the Special Drawing Rights group. This group includes the euro, the Japanese yen, the British pound, and the US dollar.
China is trying to meet the criteria as a reserve currency. Includes PBOC (People Bank of China) which keeps the yuan with a fixed exchange rate against the dollar. This allows China’s economic growth to soar thanks to low-cost exports to the United States. As a result, China’s share of international trade and gross domestic product (GDP) grew to about 10 percent.
Renminbi became the fourth most widely used currency in the world. Rise from 13th position in just three years. It surpasses the Japanese yen, the Canadian loonie and the Australian dollar.
Central banks must increase their yuan foreign exchange as reserves. That means the central bank should buy a $ 700 billion yuan. In fact the bank has never bought all the euro a number it should have even when the EU is the largest economy in the world. That’s because most of the international transactions are still done in US dollars, even though the trade has gone down.
The IMF requires China to liberalize capital markets. That means the yuan will be traded freely in the forex market. That allows the central bank to hold it as a reserve currency. In order for that to happen, China’s central bank should loosen its yuan peg value against the dollar.
China must have clearer and more transparent communication about its future actions against the yuan. That is what the Federal Reserve did on each of the eight FOMC meetings.
The entry of the yuan as a global currency reserve will give China five advantages:
- Yuan will be more used to pay for international contracts. China exports many traditional commodities priced in US dollars. If they appreciated the yuan, China should not worry too much about the value of the dollar.
- All central banks must hold the yuan as part of their foreign exchange reserves. Yuan will get higher demand. That will lower interest rates for bonds in yuan.
- Chinese exporters will have lower borrowing costs.
- China will have greater economic influence associated with the United States.