The Chinese yuan's global ambition
- Source: Global Times
- [00:28 August 26 2009]
- Comments
A popular thought these days is that the financial crisis and continuing depreciation of the US dollar have provided the Chinese yuan a good opportunity to function as an international currency.
The crisis has also taught the world the danger of over-reliance on a single currency. To some, the yuan must speed up its internationalization to hedge against the risk of a devaluation of the greenback.
Both are reasonable arguments. But creating a truly international currency will take longer than people hope.
The initial response to the yuan's global ambitions has been lukewarm. One month after the launch of a trial program to allow for cross-border trade to be settled in the yuan, only a few of the 365 companies in Shanghai and Guangdong Province approved for the trial have actually made deals in the yuan. The volume is growing slowly.
The acceptance of the yuan as an international currency to a certain degree reflects the acknowledgement of China in the world community. Behind the dollar's global supremacy lies trust in the stability of the US economy and its advanced financial system.
The benefits of 60 years of the US dollar serving as the sole global currency are obvious, but there has also been a price tag. The US has had to maintain a huge fiscal deficit to keep running the system. The current financial crisis was the result of clashes between keeping confidence in the US dollar and maintaining a balanced economic structure.
It is in China's interest to continue expanding the internationalization of the yuan. The necessary steps include expanding the adoption of the yuan in regional transactions and sign currency swap plans with more countries.
In the mean time, China also has to move forward the free conversion of the yuan, without which spreading the currency globally will only be empty talk.
The yuan's international ambitions have been challenged with a dilemma: How should China reduce its huge trade surplus in order to create demand for Chinese currency? Its stable economic growth, huge surplus and massive foreign exchange reserves have built confidence in its currency, but without a growing inbound trade volume, there would be no consistent demand for the yuan.
The yuan's globalization is also tightly linked to the expectation of its appreciation, which in the short term, will dampen China's export industry, a crucial economic pillar of the country.
The yuan has made a small step forward in its internationalization, but a lot more is needed before the goal can be fully realized.
