Yuan an international medium of exchange - Research Paper Example

The Chinese government has announced its intention to make the Yuan an international medium of exchange. Are they likely to succeed? What would the biggest obstacle be? Introduction The strength of the currency of any country is of prime importance to the economic survival and general promotion of trade and business in that country (Cooper, 2007, p 22). The value of the currency among other things influences the prices of goods and services and general cost of doing business. Naturally, investors shy away from countries where the cost of doing business is excessively higher. The underlining factor that causes countries with weaker strengths of their currency to experience increases in prices of goods and services and the general rise in the cost of doing business is that traders always have to raise more local fund to match up with the strength of other trading currencies. This is to say that the exchange rate of those countries continues to go up. For this reason, various countries continue to put in efforts to ensure that the strength of their local currency as against other global currencies is stronger. China as a country has been in the frontline in achieving this all important motive of strengthening her local currency, which is the Yuan. More to this, the country is further making strides of making her currency an international medium of exchange. Currently, the United States Dollar dominates as the world’s most recognized international medium of exchange (Frieden, 2009, p. 13-14). The question therefore remains whether or not China’s Yuan has any chances of taking over. In the following sections, the writer is going to base on the theory of realism, which in economic terms is more related to international politics and influenced by external monetary regulations and forces. This means that the factors to be considered on the chances of China to succeeding or failing would all be taken from an international rather than a national perspective. Decline of the Dollar and its impact on the Yuan Presently, the United States Dollar is the global medium of exchange. Since the beginning of this trend, the United States has benefited greatly in terms of the economic stability that the country has experienced. Clearly, if traders all across the world are seeking to have access to the United States Dollar, the only implication is that the value of the Dollar would continue to be strengthened naturally. However, various national and international factors have given rise to a situation whereby the strength of the United States Dollar continues to decline as against other global currencies. Today, the United States Dollar has been tagged as a weaker currency and thus its preference for international trading seem to be dwindling sharply (Helleiner, 2008). Without any doubt, the impact of this current trend is a positive one for the ambition of the Chinese government to have the Yuan become a global currency. From an international realism theory perspective, the initiative taken by China would have to meet a number of conditions, among which includes the fact that “there must be strong demand by world traders, investors, and central bankers for the currency as a medium of exchange for foreign trade settlement” (Yu, 2009). But once the Yuan becomes accepted as an international medium of exchange and thus becomes a global currency, it would become “a unit of account for denominating international financial transactions, and a store of value for central banks foreign exchange reserves” (Yu, 2009). And this is by no means an enviable position wanting to be taken by the Chinese government. The graph below gives a pictorial representation of how serious the decline in the United States Dollar has been from to 2005. Copied from Global Research (2011) Specific Indications that Dollar is losing its preference force From an international realism perspective, there are indications that the United States Dollar, which is currently the world’s most preferred global currency is losing its preference force. This alone should be a major indication that it is time for another currency to take over and that if the Yuan is put in a better condition, it would succeed as the next alternative. Some realistic indications that can be given to the effect that the United States Dollar would gradually be making way for another currency to take over includes the fact that Iran as a country has started staying out of the use of the Dollar in trade as it has began bartering oil for Thai rice (Global Research, 2011). Influential leaders like Russia’s Putin have admonished Russia and China to relegate the United States Dollar and use their own currencies in trade deals (Global Research, 2011). Amidst the indications that the dollar is losing its preference force for another currency to take over, there also exists a strong indication that international leaders and business tycoons would most prefer the Chinese Yuan to take over and this is a major boost for the Yuan. In a reported speech, the Global Research (2011) quotes the Thailands Deputy Prime Minister, Olarn Chaipravat, who told Bloomberg News: "The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese Yuan, to be the rightful and anointed convertible currency of the world." Why the Yuan is a perfect replacement for the Dollar Should the United States Dollar fade off as the global currency, there remain several currencies that could take over. But what makes the Yuan stand out among other currencies? In the estimate of Global Research (2011) “The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers.” There also are those who think a universal commodity such as gold should be made to take over as the global currency but this is sharply criticized for some weaknesses it has. For instance the value of gold is never stable but continues to rise and fall, depending on inflation. It is particularly noted that gold prices are higher when inflation gets higher (Leahy, 1994 p.44). Thinking of selecting the Euro also comes with major challenges such as the fact that “the euro is hobbled by concerns about the long-term viability of the European Monetary Union” (Global Research, 2011). Contrary to all these weaknesses with other possible replacements, the Yuan has put itself in a battle ready position whereby China has already set up currency swap with major global giants such as Belarus, Indonesia and Argentina (Masson, 1997). Again, steps have already been taken by allowing organizations in Hong Kong dish out bonds denominated in the Chinese currency. This means that the Yuan has already gained some global penetration to take over from the United States Dollars. Theoretical implications to the decision of the Chinese government – realism China is trending on the path of the theory of realism to get its aim of making the Yuan an international medium of exchange highly viable. By the realism theory, the country is consolidating its international image and international appeal and popularity among various countries to ensure that it gains massive international support and following for the step taken. It is not for nothing that The Wall Street Journal acknowledges that “China is being asked to play Americas role of being at the center of the world financial system” (Global Research, 2011). Already, it is common knowledge that China is a major creditor to most countries of the world, including America itself (Obstfeld, 1997, p.13). This has resulted in an economic booster whereby in the face of the global economy and in accordance with global regulatory demands from the World Bank and International Monetary Fund, China has developed “large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth” (Global Research, 2011). In the face of theoretical implications therefore, China is perfectly ready to have its call to be replaced by the United States Dollar in the International Monetary Fund’s international currency exchange supported by other global giants who benefit from China in one way or the other, and also believe in China’s role to assume a firmer economic position. It is for instance on record that several countries have began making moves to opt out of the Dollar as their choice for international trade and these countries include Iran, Japan, Syria, Russia, Libya, Brazil, Argentina and Venezuela (Frieden, 2009, p. 13-14). Challenges to making the Yuan an international medium of exchange A lot of points have been raised on why and how China stands the chance of making the Yuan an international medium of exchange; and especially to replace the United States Dollar as a global currency. However, this is not going to be a move that is going to be achieved on a silver platter. There remain several challenges that the country would have to address if it indeed wants to fast track its ambitions. For instance the country has to satisfy all of the three major pillars for the internationalization of any given currency. The fulfillment of this condition is particularly important as the country is taking the realism approach because in other to utilize the realism approach, China needs to have a very firm international image: thus the need to fulfill the pillars of internationalization of the Yuan. According to Yu (2009), the three pillars that China needs to cross now have to do with “the size of the countrys economy and its trade volume; the breadth, depth, and liquidity of its capital markets; and the stability and convertibility of its currency.” By and large, China has shown class in fulfilling most of these but there still remains a lot that needs to be done. Another major challenge has to do with possible resistance from the United States and its allies as far as preference for the United States Dollar over the Chinese Yuan is concerned. Indeed, this would be a major economic and diplomatic battle as the United States seems to have several allies who are generally considered as stronger economic forces as compared to allies of China. Some of these allies of the United States are France, The United Kingdom, Germany and Italy. Without any doubt, each of these have greater international influence as compared to allies of China earlier named to include Iran, Japan, Syria, Russia, Libya, Brazil, Argentina and Venezuela (Obstfeld, 1997, p.13). The only way out for China in such diplomatic battle would be for the country to argue with numbers rather than strength when it has to defend itself before global institutions like the World Bank and International Monetary Fund. By numbers instead of strength, the implication is that China should continue to widen her scope of international friendliness among most countries so that it would win a majority vote should that be the ultimate way out for it to overtake the United States. Conclusion As long as international trade would goes on, the need to have a global currency to lead such trades would continue to persist. As the United States Dollar has being in the forefront together with other currencies as international medium of exchange for such as long time, there continues to be concerns as to whether or not the United States Dollar deserves its current position. This is generally what has fuelled hope for the Chinese government that the Yuan could take over from where the Dollar would be left off. Through the discussion, a lot of points have been raised to the effect that the Yuan stands a very good position for taking over the realm of affairs. Among these include the positive international image that China as a country continues to create for itself and the stronger trade boost that the country has been experiencing over the years. More to this is the advancement of science and technology in the country, which has generally led to massive economic growth of the country over the last few years. These factors not withstanding, it has been established that there remain key challenges that China needs to address if t would want to take over the United States Dollar for good. The researcher therefore advocates core political well and political continuity of the aspirations of the present government to get the country where it wants to get to. REFERENCE LIST Cooper, Richard N. “Key Currencies after the Euro”. Harvard University. University Printing Press: Harvard. 2007. Print Frieden, Jeffry A. Global Governance of Global Monetary Relations: Rationale and Feasibility. 2009. Economics Vol. 3, 2009-6 Global Research. China Takes Giant Step Towards Making the Yuan the World’s Reserve Currency. 2011. Web. April 16, 2012. Helleiner, Eric. Political determinants of international currencies: What future for the US dollar? 2008. Review of International Political Economy 15:3 Leahy, Michael P., "The Dollar as an Official Reserve Currency under EMU," International Finance Discussion Papers No. 474, Federal Reserve Board, Washington, 1994. Masson, Paul R., Thomas H. Krueger, and Bart G. Turtelboom, eds., EMU and the International Monetary System, Washington: International Monetary Fund, 1997. Obstfeld, Maurice, "Europes Gamble," Brookings Papers on Economic Activity, 1997, No.2. Yu, Friedrich. How Chinas Yuan Can Become a Global Currency. 2009. Web. April 16, 2012 Read More