Could the yuan replace the dollar as the world’s leading reserve currency? – Finances – manager.bg – Finances

Could the yuan replace the dollar as the world’s leading reserve currency? – Finances – manager.bg – Finances
Could the yuan replace the dollar as the world’s leading reserve currency? – Finances – manager.bg – Finances

China’s economy is extremely successful by most measures. With a gross domestic product of 17.7 trillion. dollar, the Asian giant is in second place in the world in terms of economic power after the United States. Over the years, China has become known as the “Factory of the World” because it produces a huge number of products that each of us uses in our daily lives.

However, the Chinese currency accounts for only 3% of global trade. Compare that to the US dollar’s 87% market share. Despite its economic and political power, China does not dominate the global flow of fiat currency. But Beijing is looking to change that, writes Vishesh Raisinghani for YahooFinance.

Here is China’s multi-trillion, multi-decade plan to replace the US dollar as the world’s leading reserve currency.

What are reserve currencies and how do they get this status?

Achieving reserve currency status is not a formal process, but something more like a popularity contest.

The most popular currency for global and cross-border trade has emerged as the de facto reserve currency. The “popularity” of a currency is based on the perception of the reliability and stability of the issuing country. It is the asset or currency that most central banks around the world prefer to hold in reserve, which is why the dominant asset earns the label of ‘reserve currency’.

Since 1450 there have been six major periods dominated by different reserve currencies. Portugal dominated world reserves until 1530, when Spain took the lead. Currencies issued by the Netherlands and France dominated world trade for most of the 17th and 18th centuries. The expansion of the British Empire made the pound the leading reserve currency until the end of the First World War.

The US dollar displaced the pound as America gained economic supremacy over Britain. Since 2008, more than 75% of global transactions have been done in US dollars. The percentage of foreign currency debt denominated in US dollars is about 60%. The share of green money in the reserves of the world’s central banks is 59%.

Although the dollar’s grip on all these markets and instruments has been gradually diminishing in recent years, no other currency has come close to these levels. The Chinese yuan certainly does not represent a real alternative at the moment, but geopolitical and macroeconomic trends support its rise to dominance.

China’s plan

This year, Chinese leaders have made it clear that they want to improve the yuan’s status as a reserve currency. China’s economy and trade flows are large enough to support such a move. But now the country needs to convince foreign central bankers to start holding yuan in reserve.

In July, the People’s Bank of China announced cooperation with five nations and the Bank for International Settlements to achieve this goal. China, along with Indonesia, Malaysia, Hong Kong, Singapore and Chile, will each contribute 15 billion yuan (about $2.2 billion) to the so-called “Renminbi Liquidity Arrangement”

Meanwhile, the Chinese yuan has already become a de facto reserve currency in Russia. Russian leaders have turned to China amid Western sanctions since the invasion of Ukraine began. Now 17% of Russia’s foreign reserves are denominated in yuan. The yuan is also the third most sought-after currency on the Moscow Stock Exchange.

As these partnerships become stronger, the yuan’s status as a reserve currency may be further strengthened.

The global impact

Economists including Barry Eichengreen of the University of California, Berkeley and Camille Macker of the French central bank published a report analyzing the yuan’s potential as a reserve currency. Researchers say replacing the dollar won’t be easy or quick. However, they found evidence that yuan reserves have steadily increased in countries that have closer trade relations with China.

This growing influence could make the yuan an alternative to the US dollar in a “multipolar” world. In other words, China may reduce the influence of the dollar over time. The authors of the study say that the current position of the yuan is similar to the US dollar in the 1950s. Based on this analysis, the yuan can be expected to reach parity with the dollar in a few decades.

If the forecasts are correct, long-term investors would do well to consider increasing their positions in yuan-denominated assets and Chinese stocks with significant yuan gains.

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