China's Yuan a Reserve Currency?

Posted by: Dexter Roberts on May 20, 2009

China’s ambition to make its currency more powerful globally was on display, once again, on Wednesday. This time an official in the China Banking Regulatory Commission said that his country’s goal is for the yuan to make up more than 3% of global foreign exchange reserves by 2020. That would make the Chinese currency the fourth most important tender in international reserves, displacing the Japanese yen, but still behind the U.S. dollar, euro and pound.

While admitting that China would first need to make its still-largely closed capital account more open, Zhang Guangping, vice head of the Shanghai branch of the CBRC, stated: “we have the conditions to reach such a proportion.” In particular, China’s ambition would be realizable given the explosive growth of Chinese trade as well as its overall economy, Zhang said at a press conference.

Zhang’s comments come on the last day of a high-profile visit by the Brazilian president to China where the two countries’ leaders have signed trade agreements on everything from oil to beef and chicken imports. The visit fueled reports that the two massive developing nations are seriously considering moving more of their billions of dollars in annual trade to one denominated in yuan and the Brazilian real, and away from the dollar. This year China has overtaken the U.S. as Brazil’s largest trading partner.

Reader Comments

Duy

May 20, 2009 2:28 PM

It was only time...

Paul

May 21, 2009 4:37 AM

Actually, there are both advantages and disadvantages for being the reserve currency, as the US experience shows. The advantage is of course that your country and borrow in your own currency cheaply without facing exchange risk. The disadvantage is that your currency can become overvalued if other countries park their wealth in your country. As a result of an overvalued currency, your country runs a trade deficit. If China wishes to have the yuan as a reserve currency, she not only has to have a freely convertible currency. She also needs to successfully transform her economy from export-oriented to domestical consumption like the US or Europe. Otherwise, the rising yuan that resulted from it being a reserve currency will trim export competitiveness. For China, that's not really a bad thing as she is too big to rely on exports to drive her economy forever. The Japanese economic model failed simply because was not able to make that transformation.

Jackson

May 23, 2009 5:07 AM

It should be clear to all by now that a country simply cannot bank on one currency to keep them afloat. What makes sense today is a basket of currencies from the most powerful nations (Euro, US$, GBP, Yen, etc), out of which the Yuan could be one.

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Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.

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