Why China’s yuan still has work to do to oust US dollar as world’s reserve currency
- If Beijing wants to win wider confidence in the yuan, it has a major hearts and mind campaign on its hands to shore up its currency’s appeal
- The crackdown on China’s hi-tech sector will not help in the short term but, with market-friendly policies in place, the yuan’s future looks bright
It was never supposed to be a race to the top, but the matter of which currency gets to dominate world financial markets has been the subject of hot debate for years.
And, China’s yuan still has a long way to go before it wins wider appeal as a reserve currency. As a result, the dollar’s dominance looks safe for the time being.
The dollar has easily fitted the bill since free-floating exchange rates came into being after the breakdown of the Breton Woods fixed exchange rate system in 1973. Its share of global currency reserve holdings peaked at around 85 per cent in the early 1970s, gradually declining to a 25-year low of 60 per cent in the first quarter this year.
After all, China is the second-largest economy in the world, it is the powerhouse of global manufacturing and has impeccably strong country risk fundamentals. The yuan has considerable backing from China’s vast foreign exchange reserves, which were worth US$3.2 trillion in July.
Liquidity conditions are improving and China’s economic fundamentals are sound. Beijing is working hard to open its domestic markets to international investors.
Beijing might be on a long-term mission to boost market share, but it needs to work quickly to broaden the yuan’s appeal to avoid losing out to other major currencies such as the euro, Japanese yen, British pound and the Canadian and Australian dollars.
In the longer term, Beijing has its work cut out to build up the yuan’s credibility and boost investor confidence. The recent crackdown on China’s hi-tech sector will not help in the short term but, with the right market-friendly policies in place, the yuan’s future looks bright.
David Brown is the chief executive of New View Economics