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22 Tuesday Mar 2022
Before the yuan can become a global currency, it must first be successful as a reserve currency. That would give China the following benefits:
The yuan would be used to price more international contracts. China exports a lot of commodities that are traditionally priced in U.S. dollars. If they were priced in yuan, China would not have to worry so much about the dollar’s value.
All central banks would have to hold yuan as part of their foreign exchange reserves. The yuan would be in higher demand. That would lower interest rates for bonds denominated in yuan.
Chinese exporters would have lower borrowing costs.
China would have more economic clout in relation to the United States.
It would support President Jinping’s economic reforms.
China is working hard to make the yuan the next global currency. Although presently a reserve currency, the yuan can’t upstage the U.S. dollar unless the following scenarios happen:
Central banks around the world choose to keep a total of at least $700 billion worth of yuan in foreign exchange reserves.
The People’s Bank of China (PBOC) allows free trade of the yuan and relaxes its peg to the U.S. dollar.
The PBOC becomes straightforward about its future intentions with the yuan.
China’s financial markets turn transparent.
Chinese monetary policies are perceived as stable.
The yuan acquires the U.S. dollar’s reputation of stability, which is backed by the enormity and liquidity of U.S. Treasurys.
15 Tuesday Mar 2022
Posted Economics, Economy, Politics, Uncategorized
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A reserve currency (or anchor currency) is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.
The United Kingdom’s pound sterling was the primary reserve currency of much of the world in the 19th century and first half of the 20th century.[1] However, by the middle of the 20th century, the United States dollar had become the world’s dominant reserve currency.[2] The world’s need for dollars has allowed the United States government to borrow at lower costs, giving the United States an advantage in excess of $100 billion per year.
John Maynard Keynes proposed the bancor, a supranational currency to be used as unit of account in international trade, as reserve currency under the Bretton Woods Conference of 1945. The bancor was rejected in favor of the U.S. dollar.
A report released by the United Nations Conference on Trade and Development in 2010, called for abandoning the U.S. dollar as the single major reserve currency. The report states that the new reserve system should not be based on a single currency or even multiple national currencies but instead permit the emission of international liquidity to create a more stable global financial system.
Countries such as Russia and the China, central banks, and economic analysts and groups, such as the Gulf Cooperation Council, have expressed a desire to see an independent new currency replace the dollar as the reserve currency. However, it is recognized that the US dollar remains the strongest reserve currency.
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