For much of the past century, the US dollar has reigned as the world's reserve currency, monopolising global trade. Now there is increasing talk that the greenback might one day be replaced by the redback - the Chinese yuan.
One reason is that China has been diligently working to boost the acceptance and use of its currency. Domestically, China has introduced measures to expand the yuan’s convertibility while externally, it has made moves to encourage the settlement of trade directly in yuan.
These include initiating yuan swap agreements with countries including Thailand and yuan clearing banks in global financial centres. These banks have been set up in Hong Kong, Macau, Taiwan, Singapore and London, and more are planned for Frankfurt, Paris and Luxembourg.
China is also trying to establish a secure worldwide payments network – the China International Payments System – to rival the dollar payment systems, namely the privately-owned CHIPS system and the Federal Reserve’s Fedwire.
The world is warming to the greater use of the yuan. Last year the yuan rose to become the second most popular currency for global trade finance in the world, overtaking both the euro and the yen, and the use of the yuan has been surging in foreign exchange markets.
But the use of the yuan for trade is a very different matter that its becoming a global reserve currency. This would require radical and
disruptive changes for China, which would have to throw open its capital markets, let the yuan to move freely and condone running trade deficits. Beijing has shown no sign of
wanting to do this.
Indeed, although Chinese officials have expressed strong frustration with the dollar’s status quo, the official position is not to establish the yuan as an alternative reserve currency but to replace the dollar as the prime reserve currency by a basket of currencies.
The governor of the People’s Bank of China, Zhou Xiaochuan, describes this as “an international reserve currency that is disconnected from international nations and able to remain stable in the long run”.
China had favoured the IMF as the international agency to establish such an alternative reserve
But an agreement to reform the IMF in 2010, which would have given a greater voice to emerging nations, has not been implemented.
China has now thrown its weight behind the New Development Bank, announced last week. This bank, known as the Brics Bank, will be headquartered in Shanghai and is expected to become part of the global realignment of currencies.
We certainly do live in interesting times!