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4 Reasons Why Yuan Won’t Replace Dollar as Reserve Currency

dollar vs yuan 2The battle is on between the dollar and yuan as the world’s reserve currency. Or is there a battle at all?

The dollar will remain the world’s top reserve currency—not the yuan any time at all—and for four good reasons to be spelled out in a while.

A CNBC report early this year echoed a general sentiment that the greenback is ready for a fall as the top reserve currency by 2015. Meaning, countries will stop using our money to exchange goods, or conversely, we need to change our dollar to another currency to export or import goods.

The country’s trillion-dollar debt, the dollar’s diminishing share in global money supply,  and the Feds’ quantitative easing program—print more money to stimulate the economy—have doomsters worrying about the dollar’s credibility in the face of the Chinese yuan’s growing influence.

But just last week, Reuters reported a rebuttal: the dollar is soaring as consumer spending hits a six-year high and the Feds plans to ease out its stimulus plan.

The dollar even hit a three-year high of 84.371 in the US Dollar Index, which pits the dollar against six other major currencies. Notably, the dollar rose because the euro fell during the period, the report said.

When Americans spend the US economy gets stronger, as shown in this article why buying stuff is good for the country and stashing cash under your bed is bad.

It looks like the dollar has got back to the doubting Thomases whether it still has the power to remain the world’s top reserve currency.

What’s going on? Was the dollar even in danger at some point of losing its prominence?

Money talk is not enough

To be clear, and to the credit of the CNBC report, the dollar is still the major reserve currency. It holds 62% of the world’s aggregated reserve currency. In short, most of the central banks in other countries hold a lot of dollars for the capital market.

The yuan is not even among the next top four reserve currencies: the euro, yen, pound sterling, and Swiss franc.

The fear of losing the dollar seems to stem from looking at the issue from a purely economic standpoint: the recent recession, diminishing purchasing power of more Americans versus the increasing buying power of more Chinese, the manufacturing migration to China… all these talks about the inflow and outflow of cash make the currency current look like moving away from the US.

Although these concerns are rational, but there are non-economic factors to consider and they buttress the dollar.

Government transparency

How many people truly understand the dynamics behind the yuan? Maybe as many as the 35 members of China’s State Council.

The lack of transparency will be the main drawback against the yuan. Stability is the biggest factor why countries gravitate to the dollar, which has not been devalued ever.

The yuan, on the other hand, is tightly controlled by China, even as Western countries led by the US call for more liberalization of the yuan.

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As late as last April, China was insisting on market interventions, sprucing up the yuan to avoid a disruption as the world’s second largest economy shifts from export dependence to domestic consumption.

In short, the yuan is yet to grow up, an infant that is vulnerable without the nanny government. Compare that to the dollar, which is a full-grown adult that can confidently walk in the rough streets of open markets.

Expecting China to loosen its grip on the yuan is like hoping for its Politburo to hold democratic elections soon.

Politics

dollar vs yuanThe UN Population Division and Goldman Sachs predicted in 2011 that Chinese middle class will be four times larger than the American middle class population by 2030. Sure, but it is not because Americans are getting poorer; the Chinese are just getting richer. And middle class people seem to think along the same line. They want assurance from their leaders.

The political silver lining (for the US) in the rise of China’s middle class is that as they accumulate more power, they will challenge their Politburo, the main authority in China.

The uncertainty of this situation will likely pressure many rich middle class Chinese to invest in a more transparent environment like the US, not unlike the substantial migration of investments that happened from Hong Kong to Canada before the colony was handed to the mainland in 1997.

Yet another simmering issue for China is that most of its middle class are concentrated on the few, rich cities. How much stress these cities can take—we’ve seen the severity of Beijing’s air pollution—we can only imagine.

Compare that to the American middle class who are fairly spread out across the country, the opportunity to create dynamic pools of economic activities in more places is one of the country’s unrecognized but true economic strengths.

Money-wise, the rising middle class in China will spill over to the US economy. More Chinese are likely to spend in the world’s number one biggest economy (makes sense) and more US companies will sell more in world’s second biggest economy, China.

These political, demographics and economic factors only add, not subtract, to the strength of the US economy.

Friendly pressure

The yuan is already being traded directly between China and two other countries: Australia and Japan. That means, both countries do not need US dollars to trade with China.

Does it mean the yuan is gradually encroaching into the dollar reserves of other countries? Yes and no. The encroaching only goes as far as the bilateral trade between China and that other country.

In world trade, the US will exert friendly pressure to maintain the dollar as the exchange currency, and the rest of the world other than perhaps North Korea, Iran, and China will not likely mind.

A Bloomberg report last February seemed ominous: China’s total trade in goods of $3.87 trillion barely surpassed the US $3.82 trillion. It is a first when taken at face value. But the significance is easily lost when services trade is cost in; the US total trade jumps to $4.93 trillion with a surplus of $195.3 billion in that sector.

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Manufacturing is China’s main strength, but world trade also involves a big chunk of financial, science, intellectual property, and information technology trade among others. For the yuan to replace the dollar in world trade, China has to go past making cheap products, it seems.

Yes, China is embarking in infrastructure development, exporting its construction and engineering to mostly developing countries. But that’s a long road to take and one that will face stiff competition from the US apart from the other reasons we mentioned above.

History is on dollar’s side

The world’s reserve currency had always gravitated to the country or empire that dominated its neighbors.  The ancient Greece’ silver drachma, the Roman-issued coins, the Byzantine’s gold solidus, and the Arabian dinar were some of the dominant currencies during their respective ancient reigns.

In modern history, the Spanish silver coin and the British Empire’s pounds had exerted their influence across the globe.

There is one underlying common thread among these past reserve currencies: they are distributed mainly across their empires, an unstable grouping of colonies and conquered markets. This means that their reserve currency was dependent on their ability to maintain their empires; once their empire lost power, so did their currency.

That exactly what happened to these empires, as when Britain lost most of its colonies after the Second World War, just when the dollar took over.

As for the dollar, the landscape cannot be farther from the historical trend. The US dollar is built on the strength of a single, solid market of Americans who buy and sell stuff. That’s a huge starting point; add to that the collective historical, cultural, and political ties of the Western countries to the US.

Perhaps it is a historical first that a universal currency is being used by the largest pool of consumers who belong to a country, and more importantly, who will defend this country from outside threats.

The US dollar sits on a solid bedrock of its over 310 M population, while the yuan is spread across 1.3 B Chinese who will start demanding more rights from their government as they get richer.

Will the dollar dissipate from being a world reserve currency as the sterling pound soon? Only as probable as California declaring war on Nevada.

CONCLUSIONdollar vs yuan 3

Make no mistake the yuan is destined to be a major world reserve currency, if it is not yet. The farthest it can do to the dollar is eat up a chunk of the world’s dollar reserves through bilateral negotiations. Other than that, the yuan, at best, will elbow out the other major currencies as a world reserve currency, but not the dollar.

 

DO YOU THINK THE YUAN WILL REPLACE THE DOLLAR AS THE WORLD’S RESERVE CURRENCY?

 

Category: Financial News

13 Comments »

  • Robin, your right when you say that the fed “print(s) more money to stimulate the economy”. The problem though is that the government prints worthless unbacked money as needed. That is actually called – counterfeiting. Mabee the fed should go to prison for doing that heh? Fraudulently claiming value where there is none is a practice that is going to show the “emperor having no clothes” soon, and when that happens the yuan will be our next first choice to replace this “wizard of oz” internationy currency.

    Tom Steininger
    St Petersburg FL

  • Avatar @jvholmes87 says:

    Hmmmm…You use some facts but not enough to back what I feel is mainly opinion. Sorry, but I think you are to blind by being a American and not leaning more to actual facts to make a un-biases post. The middle class is reducing in size, the buying power of the dollar is decreasing in the US, cost of living is rising, taxes are on the rise but wages aren’t keeping up with the pace of the inflation. Government spending is increasing and providing a false sense of natural sustainable growth in our country. Yes, China does control their currency but the US has it’s own flaws in the things they do as well. While China is encouraging their people to buy gold & silver in a effort to increase the nations wealth. What is our government doing to encourage our people’s wealth?

  • Avatar David says:

    It doesn’t matter if 65% of the world is holding onto u.s dollar as a reserve. Just keep printing money and deflating the value of the u.s dollar to get out of debt. Other countries will start to unload the dollar. However, i believe the u.s main goal is to control all the oil. Reserve in the world. If we are able to do so, oil will be the new commodity to replace gold. You need oil to do everything in the bio tech future. We will see after world war 3. It’s going to happen, don’t thin it’s not. The only problem with the u.s it’s the socialism. The government tax you so bad to the point where we just make enough to survive. With all these new tax laws and countless welfare spending, the dollar ain’t worth anything.

  • Avatar CRivera says:

    All those reports showing this and showing that are “FIXED” by people like YOU to continue the smoke and mirrors campaign telling US look the other way, there’s nothing to see here or as in the Star Wars movie… “These are not the droids we’re looking for”… Lots of good rhetoric from you, empty words with no proof. WE know your kind.
    X22 report, Greg Hunter are people that DO keep us informed the TRUTH and REALITY of our situation as a nation. I suggest you get your facts straight.

  • Avatar Michael Apostol says:

    You cannot change currency like flipping a switch when it comes to global superiority. The article is correct when it says that countries may do unilateral trading with different currency other than the dollar. In time the dollar may be replaced due to devaluing. There are many factors that come into play, though. Lately the dollar has gained in value. We will see what the next administration will do. Over time it may be replaced but not anytime soon, I don’t believe.

  • Avatar Robert says:

    Your are just like most of the others who write alone these lines… do a little research and you will realize you have been duped into thinking we still use DOLLARS… we don’t! Look up the definition of a dollar. We use Federal Reserve Notes governed by the Uniform Commercial Code.

  • Avatar Daniel says:

    You stated that the dollar has never been devalued, but that was the effect of quantitative easing. The value of the dollar was reduced to encourage spending rather than saving.
    Now there’s two trillion extra against our debt sheet and the dollar was reduced in value.
    They call it QE, but that was lipstick on a pig. It was a devaluation.

  • Avatar Patrick Thomas says:

    What will kill the dollar and is now is our debt. Our country is bankrupt. The FED keeps printing money to service our debt. This is not sustainable. Eventually our economy will collapse under the weight of the country’s debt. $18 trillion in debt and rising. Obama has threatened to veto the upcoming budget if it does not include and increase in spending. That is insanity. The budget should be cutting costs. In addition to the $18 trillion in debt we also have over $200 trillion in unfunded liabilities. This is social security, medicare, medicaid and other government programs. The FED is making the dollar worthless. They have been since 1971 when Nixon abolished the gold standard. We have a fiat currency which means nothing backs it up. China on the other hand has enough gold to bank up their currency in circulation. I’m this is one of the arguments China will use with the IMF to get them to declare the yuan as the world’s reserve currency.

  • Avatar Thomas says:

    From what I read and understand from the IMF website. The Yuan will be placed into the SDR basket on September 13, 2016. From there who knows What will happen. Anything is possible any currency could be thrown out or we could be using all of them. The IMF could look at adding even more currency to their SDR basket.
    The Yuan isn’t going to destroy the United States. We as people are going to destroy our own countries… this is sad.
    With that said all the great nations will fall this is destined.
    The little countries will rise up and rule the world.

  • Avatar Vishwas says:

    China’s socio and political system is slowly changing. A good majority of China people are educated and matured for a democracy. Its political leadership also is now more adoptive to openness and transparency than what was 10 years before. China economy is also changing towards being a service industry oriented and getting matured. Its dependence on foreign technology is reducing. Language barrier is also being removed as more and more Chinese are learning English. All counts point towards a well drawn policy and is most likely to succeed. As against, Dollar is plagued by 16 trillion American debt. American technological edge is getting blunted. Quality of American population is dwindling. About 70% of Dollar currency is held outside America. If demand for Dollars outside America goes down, Dollar is sure to crumble. Once it loses its value also goes confidence in it.

  • Avatar Tom says:

    Nonsense. Power goes to the party able to sell the goods. Not the fools who think they can print money and the rest of the world will respond. America has shipped 38% of its factories overseas in the last fifteen years. China, on the other hand, has grown massively, and now makes 50% of the world’s steel. Far more than the arrogant United States. I vote with the Chinese. If you are smart, you will too.

    • Avatar CashMcCall says:

      Tom, I read your note and you nailed it. It is the producers that have real wealth, not the borrowers who merely shift services about. You can’t eat services and services don’t put clothing on your back or shelter over your head.

      China has its problems but the US is decaying like rotted wood. The true dollar value has dropped since 1913 when the Federal Reserve Bank took over by 95%. A dollar in 1913 is worth just five cents today. Americans are playing Indian poker with each other and all they are manufacturing these days is debt.

  • Avatar CashMcCall says:

    Your article was soft. The US Reserve Currency only became dominate in 1945 after Britain was bankrupted by WWII. The Brits needed money and the US would not give it to them and instead use the Anglo American loan with stipulations that the pound sterling be traded on open markets. The sterling lost half its value overnight and was destroyed as the global reserve currency.

    The present state of the dollar used by Obama as a political weapon has caused the dollar to soar to nosebleed levels. The more unrest the more the speculators move to the safe haven. This destroys dollar liquidity. Because oil and commodities are traded in dollars, emerging markets have no liquidity to fund purchases in dollar so they forego sales. This looks like a loss of demand but it is a liquidity crisis.

    There should not be one currency for reserve, it should be a number of them so they will peg each other for stability. The dollar is at dot com levels and has destroyed US exports. Destroyed Domestic oil and wrecked havoc over emerging markets. Yellen was mindless to increase interest rates and she crashed the markets. The dollar continues to rise. Manufactuing in the US has died. It has dropped to 17% of the US economy today from 25% of the US economy in 2008. The dollar NEEDs competition from the YUAN and British pound if they every get out of the EU.

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