Is It Possible for the CNY to Replace the US Dollar in the Future - Case Study Example

Name Tutor Course Date Is it possible for the CNY to replace the US Dollar in the future? Introduction The U.S. dollar for a very long time has been the world’s de facto reserve currency. Over the past 90 years, the dollar has dominated the financial market; however, with the current wave this could be outdated because of the emergence of other currencies such the CNY. The question of whether the CNY would take over the U.S. dollar has frequently been in the public owning to the superiority. In the recent years, the CNY is becoming an "international" currency because of its applicable both within and outside of China, convincing the world of its inevitably to eclipse the U.S. dollar as the world's leading reserve currency. It is the main reason why China is viewed as a destiny and a dose to surpass the U.S. as the world's largest economy. The paper discusses the future of the U.S dollar with possibilities to the CNY to replace it. Current situation In this current economic advancement, the world is in the quest to develop and grow trade relations in order to increase global business. China as a nation has been in the forefront in promoting the CNY as an alternative to replace the U.S. currency that has dominated the international currency since the 1944 Bretton Woods conference. According to Buljevich & Park (87), China for a while has grown enhancing its influential among different countries representing nearly 11 % of the global gross domestic product indicating that more than 10 % of the world trade and 9 % of the total foreign direct investment. For this reason, reports issued by the U.S. National Intelligence Council stipulate that China’s cost-cutting measure is capable of surpassing the U.S. economy in the near future. The CNY is for sure on the journey to become the world’s trade currency despite the constant challenges facing the country such as the closed capital account that hinder it from being a reserved legal tender. In June 2011, the transitional waves in the market lead in the more than 10,000 financial institutions to contract their business in Chinese yuan (CNY). This has resulted in more imports and exports with payment done through the CNY increasing the pool of offshore of the currency in the market. The emerging markets are the main movers in the trade as they engage more in importation business and pay their goods with the CNY. The positive influence and the easy to contact business transition using the CNY within the growing institutions. Besides, China is known as the main driver of intra-Asian trade and the rapid growth in the new markets influencing the global economic landscape (Brodsky, 123). The span in which businesses carry out their operations has increased in the rank of the CNY within the international standard competiting with the world’s most used currencies such as Russian ruble and Danish krone. The influence of emerging markets China as a country is playing an important role in facilitating its currency to be ranked among the international currency. A couple of years back, CNY was barely known and people never conducted business using it but in a twinkle of an eye, China has used its currency in settling exports dealing increasing its robust and owning to the country’s massive comparative advantage in that it has a deep and credible financial center. As one of the emerging markets, China’s massive shift is as a result of credible auditors, lawyers, accountants and judges thanks to the British who established a financial center in Hong Kong in 1997 (Voda, 201). After a few years of inactivity and clear investigation of the future, the country has resulted in internationalizing its coinage through the Hong Kong center as an agent of fame. The influence of the Chinese money is growing slowly but steadily gaining approval and impact in the global market as indicated with most commodities in countries like Canada and Australia, aiding it to free its capital controls. According to Eichengreen (115), this has lead in creation of deep and liquid capital markets essential in influencing companies and individuals on how to handle their financial within the budding markets. As a result, the CNY has been gaining stability in the global market thus expanding its growth in terms of rank from an internationally non-existent currency to number nine in the list as per the 2013 reports. The international currency trend The rapid growth of the renminbi also known as yuan in the international market is beyond the usual criteria and it is for such reason that economist think that if the same continuous, in the near future the CNY will take over the U.S. dollar. China as a country has taken advantage of the reliable financial center in Hong Kong that naturally takes about 50 years to be established, making it the only emerging market with mature cavernous and liquid funds market (Li Lian, 13). This has been essential in boosting the country’s effort to reserve status of its currency in the global market. It is evident as over 50 % of the UK investment done in Asia is in or flows through Hong Kong. Buljevich & Park (23-32), illustrates that bilateral trade in merchandise between Hong Kong and the UK has rose by 13.5% between 2009 and 2012, to a total value of £12.1 billion in 2012. This is instrumental in making Hong Kong the UK's second biggest export market for goods in Asia Pacific. The trend of the CNY gaining popularity in the market is worldwide not only limited in Hong Kong but China has invested in introduction of clearing banks and accounts in more than 80 countries in the recent years. Moreover, reliable sources indicated that China is warming up to creation of another financial center like Hong Kong in its traditional financial center, Shanghai (Zhang, 232). This will have a very huge impact on China as a country and the whole world as the development of the proposed Free Trade Zone (FTZ) in Shanghai will heighten the CNY because it will be a tax-free zone and the yuan would be translatable. With such measures in place, it is very possible for the CNY to replace the U.S. dollar because there would be little government distribution and by allowing all the banks in the world to conduct business at the premises, the yuan will be popular. Possible effect The involvement of China as a country to internationalize its currency does not go minus consequences. The Chinese have experienced 35 years of a relatively stable GDP growth estimated at 10 % that has even developed further and globalizing their currency may interfere with their finance because since 1978, the global economy is the only one that has gain huge growth while the financial architecture has little effect (Sharpe, 104). Chinese economic is slowly growing despite a few religions with booming business ventures covering the entire economy. The country has laid measures in place to regain its momentum by stimulating its capital as it focuses on global advancement. Moreover, the country needs to brace itself with financial aids and frameworks to assist its main customers such as Indonesia, Vietnam and other nations in the Asia in order to gain their approval and support. On the other hand, for a country’s currency to attain the reserve status and be applicable in the global market, the nation opt to have some investing plans to enable it to hold the money. A while ago, China developed such an investment called the “dim sum bond market” in Hong Kong, that has begin to offer a real investment alternative for all the emerging markets particularly in Greater China and Southeast Asia, where trade is largely intraregional (Greenwood,467, 468). China’s great potential and influence in trade flows across the world is the driving force for the county’s currency to achieve the reserve status and strong value in the global market. The strategies are essential in facilitating the yuam to be a reserved currency as the U.S dollar become stronger in the market thus unavailable and people would be force to transact in a more readily available currency besides the dollars. Reports support the strategies by suggesting that if 20% of an emerging-market country's trade is with and within China, then the trades is more likely to conduct using the RMB/CNY rather than in relatively scarcer dollars. The position U.S dollar On the other hand, the U.S. dollar has had the privileged to control the world dominant currency in reserved holdings and international trade that has be essential in supporting the dollar during difficult periods of economy. However, the U.S government has instilled strategies to reduce its availability forcing traders to seek alternative currencies to facilitate their businesses. It is helpful for China, as it has realized that it has a huge task head pushing it to put policies in place to guide the stability of its money and gain the trust of its loyal customers and partners as it prepares to overtake the dollar. According to Miniki & Lau (342), the policies also ensures that the CNY does not become a safe haven currency, just immune from governance confiscation, currency controls, taxation and rapid exchange-rate depression but rather a reserved currency. The U.S dollar has retained the position in the global market for a very long time because of good and vigilant measures curbing bad influences that would harm its status. However, the yuam faces obstacles especially when there is increased float flowing freely interfering with transactions pace, as there is a lot of capital held behind China’s capital wall that opt to flow out but the nation has kept the issue under the limelight as it avoids to exposure the crisis that might hinder its currency in the global market. In addition, China as a nation is captivate to money printing unlike the United State stipulated by the trend of money making, for example People's Bank of China for several years has been injecting money into the system each time excess foreign capital flows into the region (Wu xiaoque, 94). The country’s credit systems are weak as shown by the recent rates of volatility, as frankly interest rates do not usually rise from 3% to 13% in the midst of a healthy economy, as illustrated in China’s financial records during the recent reporting. Technology as transitional agent The influence of globalization and the advancement of technology has heighten world’s challenges such as geopolitical situations influenced by countries such as Russia, Ukraine, EU, U.S., Britain, China, Iran, Iraq, Syria and Israel among other nations involved in influential business ventures such Eurasian landmass, oil, trade with a desire to swap the U.S. dollar. Possible conflicts are foreseeable to emerge if the U.S. dollar undergoes replacement under such circumstances, as the United State would not take it lightly owning to the many years its currency has ranked number one internationally. Research suggest that this may result into a global collapse in trade and give birth to third world war as global economic system are entirely controlled by assets, money and trade (Brodsky, 124). Countries stipulated to be anti-dollars are establishing international alliance to gain support from other nations that support their mission in getting rid of the dollar in the international trade using latest technology. Sеrgеу Glaziev, an economy advisor in one of her articles released in the media suggests that the only way to replace the dollar would be by breaking the Washington money-printing machine in order to stop the U.S. from making money that is usable mostly to facilitate chaos across the world (Wu Xiaoqiu). Anti-dollar countries have measures laid down on how to facilitate the CNY in successful replacing the U.S. dollar. Establishment of multilateral system that would be very instrumental in swapping the dollar as the Yuan would to be to transfer commodities from one nation to another and vice verse. According to Eichengreen (184), reliable partners of China such as the BRICS central banks are the one that would hold cash and transact trade as it assists in bypassing completely the dollar. At the same time, the bank would act as a de facto replacing the usually IMF because it will promote member nations to direct resources to finance weaker countries. In this spirit, the U.S. dollar would reduce, as most of its biggest foreign creditors would adversely diminish within time because of the interruption. To go by the current trends in the anti-dollar nations, the replacement of the dollar with the CNY may happen sooner before the speculated time as important global economic is on the rise and efforts to try something new would receivable with a lot of eagerness. Previous experiences with the U.S. dollar and numerous bullying from the mega money house: Washington may push many people including Americans to support the replacement of the dollar (Buljevich & Park, 118). Many people have had terrible memories dealing with the dollar in the global markets resulting in frustrations and loss of huge cash thus a wide number of traders have lost confidence moreover, would comfortable transact business in an alternative currency. For instance, the G3 – the EU, U.S. and Japan – have been China’s top trade partners for the past decade and the emerging market share of China’s trade flows has be rising steadily in line with changes in the global economic landscape. The international position The acceptance of the CNY is internationally as nations are having extended the trade settlements and are now engaging into future investment. Report indicate that 50 % of direct investment was conducted using the yuan during the end of the fiscal year, 2013 (Barro, 52). This has resulted in making the CNY listed among top global trade settlements currencies increasing its popularity. Financial analysts speculate that the future is bright for the CNY as global economic increases across the sphere. On the other hand, the yuan has be monitored closely to avoid unnecessary fluctuations in the marketplace as regulated by the central bank. The move is essential in ensuring that the CNY attains full convertible and in the end be applicable as a global currency. Banks around the world are reserving CNY as economist watch the global market and as China’s GDP continuous to stay above the global growth then its currency would act as reserved cash and switching would be possible. The world's capital markets are in dollars accounting for about 40 % while China accounts for 4 % only. China has most of its domestic market closed to international customers and as much as the CNY is freely, convertible and more so in Hong Kong, wider investment plans within the country to grow valuable are few compared to numerous customers involved in global trading (Miniki & Lau, 33). However, the CNY status is gradually changing, to gain the international standard but it will not happen overnight and at the same time, the Americans are working hard to retain the position they have held for a very long time. This has forced China to engage in numerous business dealings increasing thus receiving more foreign funds than what the country is driving investing in locally. The move is not good as the nation experiences financial deficit pushing it to export currency, allowing a huge sum of money to flow out of the country and this could be dangerous to the overall financial situation of the nation. The reserve currency status comes along with the hosting nation playing the roles of financing international trade and acting as a store of value for governments worldwide. For the last about 88 years the U.S dollar has dominated as much as the currencies are suppose to come and go, Chinese government has a difficult tracks to overthrow the dollar. A couple of years ago, the dollar were equitable to gold and countries were capable to redeem their U.S. dollar with gold at $ 35 per money ounce as illustrated by Miniki & Lau (73). Focusing on China with less investments alternatives where would they bank the huge returns and avoid deficits, inflation, and swelling debt that come with a country opening up to the international market. A possible strategy from the America would to offer to provide the security as it investments in term of “petrodollar” where the all oil dealings would take place in dollar form thus the demand of the dollar in the global market will remain high. The dollar will forever struggle to retain its position besides the up-coming currencies that emerge with great demand. The future of the Chinese yuan is dependent on how the world perceives the U.S dollar and efforts for Chinese government to back up their currency with gold might increase its influence in the international scope at the same time gathering more valuable and confidence by reliable creditors facilitating its desire to become the global currency. Conclusion Overall, no one knows the future of the U.S. dollar as far as the CNY is concerned besides the many mere speculations around the trends enhanced by globalization. The issue of the U.S. dollar begin replaced with the CNY remain entirely internationalized as the arguments are occasionally a straight-line extrapolation of the past to the future. The CNY has been rising in the rank toward begin an international currency and people’s expectations are that the yuan continues in the same direction and within no time, it would gain the status that the U.S dollar has held for a long time. However, China has the potential need not to be forgotten because with right strategies in place and strong will power, China is capable of taking over the position. The status comes with consequences and with proper frameworks in place and China wiliness to build on its strengths as well as open up for a wider investment platform then Chinese money would become universal money and China as a nation would be a true global economic power house. Work cited Barro, Robert. Macroeconomics: a modern approach. available titles cengage now series. Washington: Cengage Learning, 2007. Print. Brodsky, Noel. A short drive through the 21st century: the future of energy, trade and demographics. Lulu.com, 2006. Print. Buljevich, Esteban & Park, Yoon. Project financing and the international financial markets. Canada: Springer Science & Business Media, 2007. Print. Eichengreen, Barry. Exorbitant privilege: the rise and fall of the dollar and the future of the international monetary system. Oxford: Oxford University Press, 2011. Print. Greenwood, John. Hong kong's link to the us dollar: origins and evolution. Tokyo: Hong Kong University Press, 2007. Print. 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