Macroscope | Everybody is overlooking this developing trend in China’s yuan
‘If China’s policymakers play their cards right, there is a definite gap to fill if the dollar’s days are numbered’
The yuan might have made only a modest entry on the world stage as a global reserve currency but it marks the start of a Big Bang for China’s forex ambitions. The saying goes that “mighty oaks from little acorns grow”, but if China plays its cards right, in coming decades, the yuan could put a big dent into the US dollar’s status as the world’s leading official reserve currency.
Deeper market liberalisation, wider-ranging reforms and a fuller commitment to free-floating currency convertibility could lead the way for global investors eventually accepting the yuan on level pegging with the dollar, the euro and yen. It may take years, but at least China’s authorities have taken the first small step in what should be a giant leap forward for the currency over the future.
Unless the US is careful, “America First” could backfire into a “Sell America” campaign
For the moment, the latest COFER report on official currency reserve holdings from the International Monetary Fund shows dollar demand continues to dominate by a long stretch. The latest data shows the dollar’s share of global reserves rose to a record US$5.05 trillion, nearly 64 per cent of all official holdings. The euro lags well behind to the tune of a 20 per cent market share.
Speculation about the dollar’s demise has been greatly exaggerated in the past, as it still remains the top pick among reserve asset managers. China’s renminbi came out of the starter’s blocks in the fourth quarter of last year, with its share of allocated currency reserves totalling just over 1 per cent, or US$84.5 billion. It may be small fry compared to the dollar but it is a fair bet great opportunities lie ahead.
There are good reasons why the US’ dominance could soon be on the slide – many of them to do with President Donald Trump. With Trump threatening to push America into a more isolationist and protectionist stance vis-à-vis the rest of the world, there could be serious fallout ahead for the dollar.
The US’s twin black holes – the budget deficit and trade gap – continue to pose dark shadows over the currency, requiring massive infusions of central bank and overseas money to keep the economy afloat. The US Federal Reserve has plied the system with an abundance of quantitative easing money – as much as 25 per cent of US GDP – to keep the economy flush with funds and avoid any “crowding out” effect on borrowers.