Will the Renminbi Replace the US Dollar as the World Currency?

8/12/2019 Will the Renminbi Replace the US Dollar as the World Currency?

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CRISIL YOUNG THOUGHT LEADER 2013

Will the Renminbi repl !e the US D"ll r# the $"rl% !&rren!'(

Si%%h rth Abbi)en&ltim te Ye r

G&r& N n * In#tit&te "+ , n -ement

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E.e!&ti/e S&mm r'

Economist )vinash "ersaud has em#hasi*ed that reserve currencies come and go. Internationa&currencies in the #ast have inc&uded the Chinese +iang and ,ree- drachma coined in the fifthcentury /.C. the si&ver #unch0mar-ed coins of fourth century India the 'oman denari the/y*antine so&idus and Is&amicdinar of the midd&e0ages the 1enetian ducato of the 'enaissancethe seventeenth century 2utch gui&der and of course more recent&y ster&ing and the do&&ar.

)fter or&d ar II the internationa& financia& system was governed y a forma& agreementthe /retton oods System . !nder this system the !nited States 2o&&ar was #&aced de&i erate&yas the anchor of the system with the !S government guaranteeing other centra& an-s that theycou&d se&& their !S 2o&&ar reserves at a fixed rate for go&d.

hroughout the &ast decade an average of two thirds of the tota& )&&ocated foreign exchangereserves of countries have een in !S 2o&&ars. or this reason the !S 2o&&ar is said to have6reserve0currency status6.

/ut &ate&y the !S 2o&&ars dominant #osition in g&o a& reserves is very much cha&&enged ecauseof the growing share of una&&ocated reserves and ecause of the dou t regarding 2o&&arssta i&ity in the &ong term.

China has #rom#ted some interest in the su 7ect8 9. . . it is #erha#s a good time for the efudd&edwor&d to start considering ui&ding a de0)mericani*ed wor&d : wrote +iu Chang for Chinasofficia& news agency ;inhua. ith the !nited States recent udget crisis de t cei&ing crisis and

the (%$$ credit rating downgrade !nited States finances &oo- sha-y. his #a#er figures out whatthe reserve currency status means China and the !nited States current #osition and how there&ated issues inf&uence the future.

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http://en.wikipedia.org/wiki/Avinash_Persaudhttp://en.wikipedia.org/wiki/Taelhttp://en.wikipedia.org/wiki/Drachmahttp://en.wikipedia.org/wiki/Punch_marked_coins_of_indiahttp://en.wikipedia.org/wiki/Denariushttp://en.wikipedia.org/wiki/Solidus_(coin)http://en.wikipedia.org/wiki/Gold_Dinarhttp://en.wikipedia.org/wiki/Ducato_(coin)http://en.wikipedia.org/wiki/Dutch_guilderhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Bretton_Woods_Systemhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Avinash_Persaudhttp://en.wikipedia.org/wiki/Taelhttp://en.wikipedia.org/wiki/Drachmahttp://en.wikipedia.org/wiki/Punch_marked_coins_of_indiahttp://en.wikipedia.org/wiki/Denariushttp://en.wikipedia.org/wiki/Solidus_(coin)http://en.wikipedia.org/wiki/Gold_Dinarhttp://en.wikipedia.org/wiki/Ducato_(coin)http://en.wikipedia.org/wiki/Dutch_guilderhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Bretton_Woods_Systemhttp://en.wikipedia.org/wiki/United_States_dollar


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Intr"%&!ti"n

he )merican and Chinese trade and investment #o&icies have #&ayed an increasing&y im#ortantro&e in the economic &ife of oth the countries. he two countries have ecome one anotherssignificant trade #artner and conse% Chinas trade with the!nited States has varied etween $% and $> #ercent of its tota& internationa& trade. China is the&argest foreign ho&der of !.S. treasuries thus a&&owing the !nited States to maintain its huge

udgetary deficit. )s of ?anuary (%$3 China owned over @$.( tri&&ion in )merican de t out oftota& de t of over @$A tri&&ion more than $%% #ercent of the !.S. ,2" in (%$(. he figures from

oth the countries show that in (%$( )merican ex#orts and im#orts Bin goods exc&udingservices were worth !S @3.>( tri&&ion whi&e Chinas tota& trade vo&ume reached !S @3.>Dtri&&ion. or the first time China thus exceeded the !nited States as the wor&ds &argest tradingnation. he (%$( !.S. trade deficit with China was @3$5.$ i&&ion a record high.

China was the &argest or second &argest ex#ort mar-et for more than D> countries in (%$(com#ared to on&y (% countries in (%%%. )nd considering a&& the facts and figures it wou&d efoo&ish to ignore Chinas soaring sta-e in the wor&d trade and investment scenario.

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Chin # -r"$in- %"min n!e

here are a who&e &ot of


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ood Kac-en*ie an Edin urg 0 ased com#any estimates that China wi&& account for 5(#c of ase meta&s demand y (%$D i.e. she wi&& e consuming more ase meta&s than the rest of thewor&d.

China has a&so ecome one of the &argest consumers of a&most a&& the #roducts of the rest of thewor&d es#ecia&&y the !S. China is now the !nited StatesH third0&argest ex#ort mar-et. !S ex#ortsto China have grown a out 54( #ercent since (%%% as shown in figure $ and (.

B igure $

B igure (

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he ye&&ow meta& go&d is a&so one of the vita& factors the need to e studied. Since the ear&y(%%%s go&d ex#erts have suggested that excessive #rinting y the edera& 'eserve wou&d &ead tothe deva&uation of 2o&&ar as inf&ation #ic-s u# and ham#ers the currency.hi&e the notion of 2o&&ar &osing its status as the wor&ds reserve currency had a##eared mutedfor sometime given the &ac- of a&ternatives it is now gaining credence.

) serious &oo- into Chinas go&d ho&dings warrants attention now.

B igure 3

Its &ast re#orted go&d ho&dings in )#ri& (%%= were $ %54 metric tons. )fter ad7usting for netim#orts from Gong ong and domestic out#ut the figure is c&oser to 5 %>A metric tons. If onewere to ta-e away go&d uses for 7ewe&ry industria& and other categories and on&y add im#&ied ardemand to centra& an- ho&dings the figure is &i-e&y c&oser to ( D$% metric tons according to/&oom erg Industries )ndrew Cosgrove and enneth Goffman.

In 7ust $% years Chinas go&d ho&dings cou&d catch u# to the !.S. ased on ad7usted Chinese

consum#tion for 7ewe&ry industria& and other uses and using im#&ied ar demand as the #rimarydriver of incrementa& centra& an- additions. )nd at current run rates China is on #ace to addA(( metric tons of ars to its centra& an- ho&dings this year B3>% mt in (%$( . ,iven the &owgo&d #rice growing reserves in (%$4 a ove this yearHs &eve&s a##ears achieva &e. ,o&d wi&&

enefit from the continuing move away from the 2o&&ar as the wor&dHs reserve currency as someform of a go&d0 ac-ed currency emerges.

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Low coming to the Chinas ho&ding of !S reasury Bshown in figure 4 one cannot ignore thefact that a &arge sca&e sa&e Bor threat to se&& of her !S reasury ho&ding wou&d cause a dramaticdec&ine in the 2o&&ar whi&e increasing the interest rates.

/ut given Chinas economic de#endency on a sta &e and growing !.S. economy and itssu stantia& ho&dings of !.S. securities any attem#t to try to se&& a &arge share of those ho&dingswou&d &i-e&y damage oth the !.S. and Chinese economies Bshown in figure 5 . herefore it is anuc&ear o#tion for the Chinese government and one that they wi&& e -een to avoid. hey wi&&on&y ado#t this #osition if forced to in extreme circumstances such as a !.S. defau&t or a

#unishment over a #o&icy dis#ute.

B igure 4

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B igure 5

)&ong with a&& of that Chinas swa# dea&s with Euro#ean Centra& /an-s and nations &i-e)ustra&ia Lew Mea&and ?a#an and /'ICS cannot e ignored. It im#&ies that trade wou&d econducted without having to convert into another currency such as the !S 2o&&ar first. Someex#erts have a&so said that China is #&anning to usur# the green ac-s #&ace in g&o a&commodities trade as /ei7ing hinges on


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Other #i%e "+ the C"in The Unite% St te# )er#pe!ti/e

"eo#&e with a #essimistic &oo- towards China say that a&& of this is 7ust hy#e. here are three asic criteria for a nations currency to serve as an attractive g&o a& currency8

$ here must e a great dea& of demand to uy what your country has to offerN

( here must e a ready #&ace for them to #ut your currency whi&e waiting to s#end itN

3 here has to e a ready way #eo#&e in other countries can get their hands on your currency inthe first #&ace.

'enmin i on&y fu&fi&&s the first one. "&enty of #eo#&e around the wor&d wou&d #ay in 'K/ to uyChinese goods. /ut where wou&d they save and invest that money in the meantime ) out 4%

of the wor&ds ca#ita& mar-ets are in 2o&&arsN China accounts for 7ust 4 and much of that is inGong ong 2o&&ars not 'enmin i and most of it is in ris-ier stoc-s not the safer onds that aregood for stoc-#i&ing money. he /an- for Internationa& Sett&ements estimates that in (%$%around %.= of a&& currency mar-et transactions were carried out in 'enmin i. his is ecauseChinas domestic mar-ets are most&y c&osed to foreigners and the 'enmin i isnt free&yconverti &e ma-ing movement of money into and out of Chinese investments difficu&t. hat may

e gradua&&y changing ut it wont ha##en overnight and right now theres no good #&ace to #ut&arge


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C"n!li"n

)&& the a ove discussed as#ects are of great im#ortance for the !S China and the rest of thewor&d. It cou&d e a much igger story than whether or not the edera& 'eserve decides to ta#eror not or is as im#ortant as any other internationa& issue. It has een the Chinese that have eenthe greatest source of &i and now it a##ears that source of &i


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1. htt#8PPwww.uschina.orgPre#ortsPtrade0agenda0may03%0(%$3

2. htt#8PPwww.treasury.govPresource0centerP

3. htt#8PPwww.dni.govPindex.#h#Pa outPorgani*ationPnationa&0inte&&igence0counci&0g&o a&0trends

4. htt#8PPtheeconomicco&&a#se &og.comP

5. htt#8PPwww. &oom erg.comP#rofessiona&Ptoo&s0ana&yticsPchartsP

6. htt#8PPwww.7a#anfocus.orgP

7. htt#8PPwww.xinhuanet.comPeng&ishP

8. htt#8PPwww.te&egra#h.co.u-PfinancePcommoditiesP$%3=(A(%PChina0aiming0for0de0)mericanised0wor&d0with0renmin i0re#&acing0do&&ar.htm&

=. htt#8PPartic&es.economictimes.indiatimes.comP(%$(0%(0%>PnewsP3$%3DD>3Q$Qg&o a&0reserve0currency0yuan0do&&ar

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Will the Renminbi Replace the US Dollar as the World Currency?