Beijing hopes the Yuan will settle the dollar as the world’s best international currency, but China’s currency is facing a steep uphill battle.
Explanation
For several years, financial media have speculated about when the Chinese yuan would replace the US dollar as the world’s best international currency. Bankers and currency traders call it “global reserves.”
As an export-oriented economy where sales to the US account for 3% of the country’s gross domestic product (GDP), Beijing knows that China’s prosperity is far more vulnerable to Chinese trade than America’s prosperity. Private analysts estimate that around 16 million Chinese workers are involved in the transaction. With this at a great deal of risk, Chinese trade negotiators do not want to oppose their American counterparts to declare victory over the currency issue.
More fundamentally, Chinese authorities know, or should know how far the yuan is from achieving global readiness. Certainly, the US economy and the dollar no longer have the overwhelming control they once had. It is clearly a consideration that all countries on Earth have taken into consideration.
Still, other currencies, especially the yuan, do not have the characteristics necessary to take over the role from the dollar. What Beijing doesn’t want to promote the yuan as a replacement for the dollar is the recognition that if the Communist Party of China (CCP) is otherwise important and is willing to ease financial and currency controls, which are unlikely to surrender, the yuan can obtain the characteristics necessary to replace the dollar.
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But because of all this effort and the costs associated with it, the dollar remains dominant. Even if Americans are not involved, around 80% of global trade is carried out in dollars. The dollar is on the side that is around 90% of all currency transactions. In contrast, the original exists in just 4% of such transactions, and even the euro can only be charged 30%. For example, Egyptian pound conversion to original is usually in dollars. These powerful relationships take years to develop and years to relax in that favor.
Liquidity presents a second challenge for the original. You can trade dollars and dollar assets 24 hours a day, seven days a week. The dollar market is so large and well developed that people can easily move large quantities and have minimal impact on the prices of either currency or financial assets. The dollar market also offers a wide variety of financial products, making it attractive to traders and financial advocates who must maintain a balance between currency that acts as a “global reserve” in the course of their business. These key players value these traits and know that the original based market cannot match them.
As it should be clear, CCPs in the best situation will face years of effort and promotion to begin challenging the global position of the dollar. And it is not clear that Beijing is trying to make the necessary sacrifices. For example, this requires that the adjuster abandon strict control over the original foreign exchange value and allow it to float freely in the global currency market.
To provide exporters, importers and their financial supporters with the necessary liquidity and various investment options, Beijing must give up its current claims on controlling capital and investment flows abroad. In theory, of course, Beijing could make such adjustments. Still, they fly in the face of CCP’s obsession with control, so Ewan also fails as a starter competing with the dollar for global reserve status.
The views expressed in this article are the views of the authors and do not necessarily reflect those of the epoch era.
