Could China’s Yuan Become a Global Reserve Currency?
China’s yuan eventually could develop into a reputable global reserve currency, but Beijing would have to drastically loosen its grip on the economy, according to a Chinese economy expert, who also sees some upside to a downgrade in the US dollar’s status.
Western sanctions that froze much of Russia’s foreign currency holdings since its invasion of Ukraine have underscored the dollar’s power while also highlighting the risks of relying on it heavily.
“The use of Chinese currency will inevitably expand and play a much bigger role in the world,” Baizhu Chen, professor of clinical finance and business economics at the University of Southern California, told Insider. “Some countries feel their economies could be held hostage to US policies because the dollar is dominant, and countries want to diversify their risk.”
Already, upwards of 70 central banks hold some yuan as a reserve currency, while many African countries and some in the Middle East regularly use it for transactions, he noted.
Meanwhile, other central banks have diversified their holdings over the last 20 years, reducing the dollar’s share of global reserves, the International Monetary Fund said in a report Thursday.
And in recent weeks, more efforts to pull back from the dollar have emerged. Saudi Arabia and China are looking to use yuan in a new oil deal. Russia and India are in talks to revive a ruble-rupee ledger. Moscow has also demanded Europe use rubles to pay for its natural gas and may even turn to bitcoin for payment.
“Were the dollar to lose its status as the world’s reserve currency, it would raise interest rates for our historically large debt relative to the economy,” warned Tomas Philipson, former Acting Chairman for the White House Council of Economic Advisers.
That means American consumers and businesses would face higher borrowing costs. Prices for imports would also likely rise.
For now, greenbacks comprise 60% of global reserves versus the yuan’s 2.5%. And in global payments volume, the dollar accounts for 40% while the yuan has about 3%, even though China is the world’s second biggest economy, trailing closely behind the US, Philipson said.
That could change, but not without massive reforms.
How China can make the yuan more competitive China would have to open up its market and loosen government oversight, Chen explained, noting that historically, no currency that’s been heavily controlled has become dominant in global reserves.
In the bond market, that means China must enact reforms to reach the level of liquidity and efficiency of the US bond market. This requires lifting restrictions on interest rates as well, Chen said.
China also needs to refrain from currency manipulation, like devaluing the yuan to boost exports, he added. Allowing for an independent central bank with transparent decision-making would facilitate this.
In addition, the yuan must become as trustworthy as the dollar. “Countries generally trust that the US isn’t going to screw up. But whether the yuan could be perceived as a store of value — a safe haven during uncertainty or war — that is a much more difficult thing,” Chen said.
A lighter touch overall from Beijing would be a steep climb as it has trended toward increasing control. But it could help US investors. Signs that the government will ease up on its recent tech sector crackdown sent Chinese stocks soaring, and deregulation in general often unlocks more economic growth.
Chen said also said a more prominent yuan would have another benefit, as the emergence of multiple global reserve currencies would provide a hedge against the collapse of any single currency.
“Think of pillars holding up a board,” he said. “The more pillars that hold it up, the more stable the board becomes.”
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