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The article “Can China’s Currency Go Global” by John H. Makin considers whether the yuan could replace the dollar as an international reserve. The author delves into the current economic market of the Yuan and its financial viability, while also reflecting on its future. He looks at both sides of the coin, and after due deliberation reaches his conclusion.

The fact which most supports the globalization of the Yuan is China’s rapid emergence as a global economic superpower. As the second largest economy in the world, China accounted for about 90 percent of global growth in 2009. However, the author contends that it cannot be assumed that China’s economic achievements will translate completely into its financial markets. China has not yet achieved financial superiority and the Chinese securities market as yet poses no threat to the US, even though large companies such as Caterpillar and McDonald’s have issued Yuan-denominated bonds. 

Another issue that the author looks at is the growing use of Chinese currency for trade. According to Makin, China is heading towards internationalization of the Yuan and has thereby expanded the scheme that allowed imports and exports to be invoiced in the Yuan, with trade settled in Yuan between June and November 2010 equaling 340 billion Yuan. However, the widespread use of Yuan as a medium of exchange and unit of account (since goods are being invoiced in Yuan) does not necessitate its adoption as a reserve currency. The reason cited for this by the author are the restrictions imposed by the Chinese government.

The adoption of the Yuan as an international reserve must be preceded by a guarantee of full convertibility by the Chinese government. It would have to allow capital outflows and respect property rights. Essentially, lack of full convertibility means that to invest in capital (i.e. buy an equity stake, purchase an asset or take part in any merger/acquisition) in China you need to have an investment holding company in China which requires minimum capital of US$30 million.

Thus, Makin argues that for the Yuan to emerge as a global reserve currency not only is full convertibility imperative, rather it must also forego all further controls on global capital flows and avoid relentless currency intervention.

In his conclusion, the author uses the words ‘evolution, not revolution’, i.e. the Yuan will continue to flourish and develop, however, due to the aforementioned factors it cannot replace the US dollar an as international reserve currency for the foreseeable future.

Analyzing the article, and the ideas presented by the author, we can see that the author points out that steady economic growth has provided China with an opportunity to contest against the US dollar’s role as an international reserve currency and in June 2010 China’s government promoted trade to be conducted in Yuan through the ‘Yuan settlement scheme’.  However, according to our research, it would not be very wise to expect continuous economic growth in the future. As China has an export based economy, the existing global crisis could severely harm demand for its exports. In September 2010 exports rose by 17.1% but fell from a 24.5% growth in the previous month (BBC). This is in line with Makin’s view that present economic achievements notwithstanding, China’s currency cannot be seen as an international reserve in the near future. We agree with this viewpoint, since looking at the ground realities it is very difficult to expect the Yuan to supersede the Dollar in the near future.

Also, currently China’s USD reserves amount to a high proportion of the total reserves, because China has been buying dollars in order to keep the exchange rate low. However in order to successfully globalize its currency it needs to build its metal reserves (gold and silver). China’s current Gold holdings are 1,054 tonnes while China needs around 8000 tonnes to surpass US’ holdings of 8,133 tonnes. In last ten years China has accumulated only 550 tonnes. If China starts buying gold from the international market, rise in demand of gold would result in high prices which will increase china’s cost of purchasing gold. So China’s claim to buy 10,000 tonnes in next 10 years seems unlikely. (International Business Times)

The author further points out that in order to promote internationalization of Yuan, China allowed banks in Hong Kong to accept deposits in Yuan. However, China’s restrictions on capital flows leave people with no incentive to hold Yuan as a reserve currency. We agree with this point completely which is further validated by John Peace, chairman of the British bank Standard Chartered, "I don’t see in the short term the Renminbi replacing the Dollar, what I do see the Renminbi becoming as important as the dollar”.(Voice of America) Also, according to a New York Times article (New York Times), the banking sector in China is not at a mature enough stage to be able to handle the load of full convertibility which does not bode well for the Yuan’s role as a global currency.

Another fact which supports Makin’s view is that the acceptability of Yuan as a reserve currency in the future would depend a lot on the expected inflation rate in China. The fact that China’s inflation is expected to rise in the future, primarily because of artificially fixing exchange rates at a low level, does not place China in a position to contest against USD. Rising inflation would reduce the purchasing power of Yuan. On the other hand USA’s current and expected inflation rates are less than China’s. So it makes more sense to invest in US dollar denominated securities rather than Yuan. (Forecast Chart.com, Trading Economics.com)

Hence, in conclusion, for a currency to turn global it needs high liquidity, central bank credibility, strong internal financial market, and strong bond markets. China has not fulfilled these conditions completely yet. Its financial markets are government controlled and people’s Bank of China does not hold the required credibility. Consequently Chinese currency has a long way to go before it turns global. However, we cannot completely dismiss the Yuan.


 “China's trade growth decelerates amid global slowdown”. October 13, 2011. BBC Com. (http://www.bbc.co.uk/news/business-15285105)

“Gold Reserves: Tough for China to beat US”. April 13, 2010. International Business Times.

Heda Bayron , China Pushing for Yuan to be Global Currency. January 24, 2011. Voice of America.

David Barboza, “China Pushing for Yuan to be Global Currency”. February 10, 2011. Global Business,  New York Times.(http://www.nytimes.com/2011/02/11/business/global/11yuan.html?_r...)

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