The yuan is moving closer to becoming a global currency. This is due to the repercussions of Russia’s war in Ukraine and China’s desire to diversify trade. However, there are still many hurdles to overcome. The yuan is a latecomer, but it has great opportunities to transcend. It can compete with the US dollar and take advantage of sudden technological change in international monetary systems.
The Yuan Is A Global Currency
The yuan’s rise as an international currency has accelerated recently, with the yuan accounting for 3% of global payment flows in July, according to SWIFT payments data. But this growth has come from a low base and the yuan still lags far behind the pound, euro, yen, Australian dollar, Canadian dollar, and Swiss franc. In the future, the yuan will need to gain wider acceptance as a base for trade settlement and import-export contracting. This will require China to develop a broad range of financial markets that provide the flexibility and convenience needed by investors.
Until this happens, the Yuan International will remain limited to Beijing’s ability to use its foreign exchange reserves to decouple it from the dollar. But it’s not yet clear how long this will take. Until then, the yuan will be a minnow in the global currency sea. As a latecomer, it faces the challenge of breaking the dominance of the US dollar.
It Is A Safe Asset
While many observers see China’s introduction of a digital currency as a progressive, technical move that will make payments more efficient, the reality is more likely to be a tool for increased state control. A central bank digital currency (CBDC) would allow the Chinese government to closely monitor transactions and personal behavior. As a result, it could undermine the legitimacy of China’s political system and lead to social unrest.
The yuan’s lack of well-developed financial markets and strict rules on direct, onshore portfolio investments by foreigners are also major barriers. It will take a long time for the yuan to become a genuine alternative to the dollar and Treasurys, said Rahbari. Investors interested in investing in the yuan should carefully follow economic and government news from China. They may also want to consider leveraged investments, such as yuan currency futures and forex market trading. However, these transactions can magnify gains and losses, so investors should be aware of the risks.
It Is A Latecomer
The yuan is not among the world’s major currencies, but it is gaining ground in the global currency market. Its popularity has increased with the growing need to diversify international assets away from the US dollar. China has taken steps to make the yuan more accessible, including expanding its cross-border financing system and promoting its use in overseas markets. The People’s Bank of China has a wide range of tools at its disposal to manage the foreign exchange market. Some are transparent, like the daily reference rate; others are more obscure, such as secretive measures to encourage banks not to take one-way bets on the yuan.
However, the yuan’s rise has been complicated by tensions between China and the United States. In late 2018, the Trump administration imposed tariffs on Chinese goods, which accelerated the pace of yuan internationalization. As the yuan weakens, investors will continue to scrutinize the country’s hybrid financial system and its government’s role in it.
It Is A Global Reserve Currency
While the dollar still dominates global trade and currency trading, the yuan has begun to compete for its share of reserve currencies. It has gained acceptance as an international currency for settling oil purchases and is gaining traction in China’s global markets. The Chinese government has been working to promote the use of the Yuan International, including through increased foreign investment and by signing currency swap agreements with many countries.
A successful reserve currency must offer a variety of financial assets to investors, such as short-term deposits, bonds, stocks, and options. It must also offer an acceptable level of liquidity and be subject to price fluctuations. In addition, the financial markets denominated in a reserve currency must be transparent and accessible. China’s communist need for control makes it unlikely that the country will allow open and flexible financial markets, which are essential to support a global reserve currency. In fact, it’s more likely that the yuan will be replaced by another currency or system before it can challenge the USD.
Conclusion
The yuan is on the verge of becoming an international currency, a safe asset that can compete with and coexist with US dollar assets. But it will take a great deal of time to break the USD’s dominance.
