Can Yuan be the world’s next Reserve Currency

8/8/2019 Can Yuan be the world’s next Reserve Currency

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The Rise of China as

World’s 2nd LargestEconomy..

an Yuan be the’orld s next Reserve

urrency ?



Snap Shot of the Flow Transformation of China’s economyChina’s current policies

Reserve currency & its Need

Why $ as the reserve currency ?

Alternative currency & its need

Yuan’s Current position in global market

Parameters of reserve currency

Possible competitors to Yuan



Economic HistoryCollapse of the Republic of China (1911-

1947)

Formation of the People’s Republic of China

Deng & Free Market Reform



RemarkableTransformationsAverage economic growth of 9.5% over the past

two decades

National income doubling every eight years.

Total factor productivity growth of 4 % per yr

since 1990China's foreign trade has grown faster than its

GDP for the past 25 years

Significant and steady growth in investment,

consumption and standards of livingChina has lifted 300 million citizens out of

poverty

Most sustained and rapid economic change



Current StandingWorld’s second largest economyLargest foreign investor in resource rich

African continentFour of the world’s 10-largest companies

Three of the world’s 10-largest banksHome of the word’s largest IPOWorld’s largest exporterWorld’s largest auto market

World’s largest Energy consumerSecond-largest importer of crude oilWorld’s largest buyer of iron ore and copper



Currency policyAverage price of a Big Mac in 4 US cities was

$2.71 in April 2003, same was priced$1.20 in China.

The Economist says RMB is undervalued

56% to dollar though Goldstein & lardystates it as 32%lowerSince 1994 to 2003,RMB's actual exchange

rate was 8.4 to dollarRecently due to pressure of Capitol Hill,

RMB was APPRECIATED to 6.2 againstdollar

``Beijing's artificially debased currency''allows China to export to US market with a

40% price advantage as compared to US



Currency policyPredatory trade policy -Paul KrugmanSoft mercantilism;

High tariffs Large export subsidies

China's use of artificially cheap capital andoutright subsidies to develop newindustries, could be considered legitimatedomestic development tools but predatory

in the context of trade.

I Chi



Is China a currency

manipulator ?Foreign trade policy:Open door policy

Ø Open door policy which was implementedafter 1st opium war, once again came into

existence in 1978Ø China's policy of opening up to the

outside world.

OECD has helped EU to play significant role

in capital investment of China to reducedomestic inflation

As half of China is funded by EU, withManufacturing Units in China but

operation, managerial ,marketing activities



WTO unfulfilledcommitmentSince its inception in WTO in 2001,china has

certain unfulfilled commitments with WTO;Ø Lifting Barriers in Auto Mobile &

Telecommunications Market



What is reserve Currency?A foreign currency held by central banks and

other major financial institutions as a means topay off international debt obligations, or toinfluence their domestic exchange rate.

A very large percentage of commodities such asgold and oil are usually priced in U.S dollars,causing other countries to hold this currencyto pay for these goods



Need for reserve Currency

The reserve currency is generally selected basedon the strength and stability of the economy.

It Should serve the store of Value.

Hence when a currency of any nation becomes

less stable, or its economy becomes lessdominant, that currency should theoretically bereplaced by the currency of a more stableeconomy.



Watch The Picture Closely



Why $ is the ReserveCurrency??

The Vietnam War :balance of paymentsdeficit and a trade deficit, the first in the20th century.

Other nations began demanding fulfillmentof America’s “promise to pay”

President Nixon" closed the gold window” in1971, ending convertibility between USdollars and gold.

The Nixon shock.



Contribution of $ in IMF and otherfinancial organizations

The International Monetary Fund (IMF) is theintergovernmental organization that overseesthe global financial system by following themacroeconomic policies of its member countries.

It is an organization formed with a stated objective

of stabilizing international exchange rates andfacilitating development.Decisions to allocate is in proportion to quotas.What are Quotas?US held one-third of all IMF quotas at the outset.It

has by far the largest share of votes (approx.17%) amongst IMF members



Free floating nature of $currency

A floating currency is a currency that uses afloating exchange rate as its exchange rateregime. A floating currency is contrasted witha fixed currency.

Free-floating currencies can be traded by any

one and are the most popular choice of trading. There are no set standards regardingintervention that need to be observed.

Free-floating currencies can be traded by anyone and are the most popular choice of trading.



The need of having alternativecurrency..



A different angle…

We can see the global monetary system as aprogram.

What would you do with it? If you were

disadvantages by it, you’d completely dropit and reprogram the whole thing. Some of us intend to be a part of doing exactlythat. Change the agreements, “open

source the system.” Why? The sum of valid money in the world is

unknown. Is this an operating system?



currency

The practice of the central banks of accumulatingdollar reserves has become more pronouncedafter the 1997 Asian financial crisis, bydemanding dollars for local currency, depletingthe central banks’ dollar reserves.

Fast-forward 13 years later, and the dollar’s statusas the world’s preferred reserve currency hascome into question amid a ballooning budgetdeficit that keeps the US dependent on foreign

financing.Both Russia and China last year suggested a type

of “super-sovereign reserve currency” tochallenge the dollar.

Dollar reserve holding percentage has been on asteady decline before the financial crisis.



Some facts… The dollar declined to a level between $1.50

and $1.60 euro in 2009. Yen weakened 0.3 percent to 134.59 per

euro from 134.22.

The U.S. currency fell 0.5 percent to 95.44yen from 95.95.“To prevent the deficiencies in the main

reserve currency, there’s a need to createa new currency that’s delinked from theeconomies of the issuers,” the People’sBank of China said in a review of theeconomy in 2009.

The Obama administration is projecting that

the deficit for the 2010 budget year will hit-



Has the day arrived ???

Dominique Strauss-Kahn, the head of the

International Monetary Fund (IMF), saidrecently that it would be “intellectually

healthy to explore” the creation of a newglobal reserve currency to reducedependence on the dollar. But “that day hasnot yet come.” However, his remarks

signalled broader concern over thedominance of the dollar, and “the extent towhich the international monetary system asa whole depends on the policies and

conditions of a single, dominant, country”.



Yuan’s Current standing inworld market



Will China’s growth make Yuan TheStrongest ?

Today, China is the fastest growing economy in the world,which is soon likely to replace the world’s super powers

Inspite of strong foreign inflows, the Chinese governmentyet does not allow the currency to move with marketforces, artificially pegging its value to the US Dollar

However, with growing international market forces andthe pressure from various countries, the Chinesecurrency is soon likely to be trading in line with marketforces

With the above falling in place, China could see the Yuan

dominate many markets

na s growt as



na s growt asdisplaced some of the largesteconomies from their position

,A s p e r th e IM F p ro je ctio n s’C h in a s is e xp e cte d to

co n trib u te o n e th ird o f th e w orld G D P g ro w th b y 2 0 1 5

In fa ct C h in a 's G D P is.fo re ca st to rise 9 5 p e r

,ce n t in 2 0 1 0 a cce le ra tin g. ,from 9 1 p er cen t in 2 0 0 9

th e h ig h e st g ro w th ra te am on g st th e re st o f th e

w o rld A cco rd in g to ro u g h

, ’e stim a te s C h in a s G D P w illm o st like ly su rp a ss

’Ja p a n s G D P w ith in th is

,ye a r m a kin g it th e secon d la rg e st e co n o m y a fte r th e



China’s Forex Reserves

As 2009 progressed, the upward march resumed, with

reserves rising above USD2 trillion in April and reachinga record USD2.447 trillion at the end of March 2010(Source: People Republic of China)



Will China Repeat Past Trends ?? If history of the last switch in reserve currency (frompound sterling to the US dollar) is any guide, the

Chinese renminbi can be expected to replace the USdollar as a reserve currency around 2050

The UK lost its position to the US as the world’s largest

economy in 1872 and the largest exporter in 1915. Theswitch in net debtor/creditor positions started 1914, andas the US dollar emerged as a creditor, its use infinance and trade widened. By 1945, the pound wasdethroned. Today, the US is in a net debtor position,with China being the world’s largest creditor. China is on

its way to becoming the world largest exporter. So thesehistoric parallels might imply a switch in the reservecurrency by the mid-21st century



Yuan’s Pegging to the US Dollar

Today, the Yuan is not a fully convertible currency The Yuan has been pegged against the US Dollar for years

and is still allowed to move only in a narrow band of 0.5%.

The depreciation of the Yuan compared to the Dollar hasalready caused a growing tension between The U.S andChina in recent weeks.

The foreign investor as well is looking for a currencyappreciation, in order to enhance his return oninvestment

The yuan is most likely to proceed towards some amountof convertibility as the chinese government has givenits intention to do so.

Th i f h d i



The size of the domesticeconomy

The EU and the US still remain the world'stwo largest economies by gross domesticproduct about 50% of the world total of $61.8 trillion.

But China at this moment in time is the onlycountry that can survive the comingfinancial devastation - tapping the limitlesspotential of its 1.3 billion citizens.



Free Floating Currency

Reserve currency needs to be free floatingto have a benchmark so that the price canbe compared to the global price, to theprice structure.China has a massive export

economy to protect. It is predicted thatChina will be the biggest manufacturingeconomy in the world by 2011. Also AlanGreenspan fears that removal of capital

controls that restrict the ability of domesticinvestors to invest abroad and to sell or topurchase foreign currency which is anecessary step to allow a currency to floatfreely could cause an outflow of depositsfrom Chinese banks destabilizing the



Backing of FinancialInstitutions - TBTF

Dominique Strauss-Kahn, the head of theIMF, said there could be a globally issuedreserve asset some day but “that day hasnot yet come.”



Convertibility of Currency

Yuan's value would have to be dictated bythe market around the world freely buyingand selling it. Acc. to western investorssuch a loss of control would never be

allowed by the authoritarian Chinese. Though the perception is changing byproviding Yuan to other central banks foruse in trade with China. But the major

central banks would be loath to hold anylarge sums of any currency and the purestdefinition of a reserve currency :It can besold or traded without limitation.



Opening up of FinancialMarkets

It has become urgent for the authorities tostrengthen financial markets(governance,the exchange rate system, the supervisorysystem, etc.)

But it argued that China’s limitedvulnerability to the Asian financial crisis &subprime crisis is due mainly to its lowerlevel of financial openness.



denominated in foreigncurrency

The Western countries need to purchasebonds denominated in yuan and sell atmarket rates. Until now yuan-denominatedbonds have been sold only by Chinese

banks along with multilateral banks suchas the Asian Development Bank andInternational Finance Corporation and thebonds have been mostly sold only in China



Liquidity

One important reason the US dollar remainsthe reserve currency is that the U.S.treasury market is the ability to cope withhuge liquidity demands.

Fa cilita tin g lo b a l tra d eRoughly 88% of daily foreign exchange

trades involve US dollars. &il G o ld

I th R i bi t



Is the Renminbi nextglobal reserve currency?

The Chinese renminbi can be expected toreplace the US dollar as a reserve currencyaround 2050.

Today, the US is in a net debtor position,with China being the world’s largestcreditor.

The renminbi is far from ready to achievereserve currency status.



SO what is possible?

SPECIAL DRAWING RIGHTS (SDRs)



What are SDRsSpecial drawing rights were devised by the IMF in

1969 to replace gold and silver in largeinternational transactions and to serve as asupplement to central bank reserve positions.

Though freely convertible in IMF transactions, SDRsaren't a currency. Instead, they're credits that anation with a trade deficit can use to settlebalance-of-payment debts

SDRs can be exchanged for freely usable currencies The SDR basket's makeup is determined every five

years by the IMF executive board. Currently, theSDR basket is weighted as: • U.S. dollar: 41.1 percent• Euro: 36.1 percent• Japanese yen: 13.5 percent• British pound: 8.9 percent

Note : The data is as of 2009



Favorable factors

Since SDRs are ledger entries, their useeliminates the logistics of shipping bullionback and forth to settle national accounts

IMF’s funds trebled to $750bn (£510bn), and it isalso set to take a more proactive role in'bailing out' troubled countries, by extendingloans before real trouble hits.

The most favourable move has been – adecision to allow the IMF to print $250bn worth

of SDRs This will reflect a diminution in the dollar's heft.



Favorable factors

IMFs proposal:oMove to more flexible exchange rate

(appreciation)

oDrop hard peg; move to basket of currencies

(SDRs)

This can been seen to play a role inestablishing a new global reserve currency.



SDRs and YUAN

YUAN is still to get the status of a HARD currency. The head of IMF Dominique Strauss-Kahn said, “This question has to be considered. I think it will

be difficult to include the renminbi before the

renminbi really has a market price and is in oneway or the other a floating currency. But but thesooner, the better……………Because as timegoes by there are more and more reasons toinclude other currencies in the SDR basket --

starting with the renminbi.”China said it would resume a policy of greater

exchange rate flexibility for the Yuan afterkeeping it pegged at about 6.83 to the dollar forthe past two years. The move is expected to leadto a gradual rise in the Yuan's value against the



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Can Yuan be the world’s next Reserve Currency

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