Could the Chinese Yuan replace the US Dollar as the reserve currency?
Since the financial crisis back in 2008, many emerging economies in east Asia have been using the Yuan as the main reference currency. Countries such as Malaysia, Singapore and Indonesia have been reported to track the Chinese currency more closely than the American dollar.
Yuan vs Dollar
Why?
One of China’s many economic goals is to internationalise it’s currency; promoting international trade in Renminbi. It is said that currently, as both the US dollar and the Euro are under pressure, Investors are looking for a new reserve currency.
But, what would happen?
This article by Deutsche Bank Research,
gives a great insight into the advatanges and disadvantages of having a currency as the ‘reserve currency’.
However, there is one section that catches the eye. In short it says that China’s fall in dependence on the USA as an export market and the USA’s constraints in terms of financing its foreign debt will allow China to influence US economic and financial flexibility. This is likely to affect the USA’s political position in the world.
Will the USA allow this? What actions will they take to prevent/stop this from happening? International Relations and Global Politics will greatly be affected by this change in power and currently, it seems that with the US dollar and Euro in dismal situations, we may see this change in the next 5-10 years.
Cartoon depicting China helping the USA’s current financial problems.
Articles:
http://www.reuters.com/article/2012/03/18/us-china-currency-imf-idUSBRE82H02L20120318
http://europe.chinadaily.com.cn/business/2012-10/24/content_15840921.htm