The Future of Yuan
China is one of the fastest growing economies in the world. The trade between china and other countries has increased to a great significant with the globalization of the world trade. In this regard, the use of china currency (Yuan) has increased to a great extent. Due to this, china has been struggling to internationalize its currency but this has not been effective so far. This research paper will evaluate the future of the Yuan. It will find out whether the china will succeed in internationalizing its currency like other currencies such as US dollar.
The exports from china to other countries have greatly increased in the recent years. This is due to the fact that china has been able to produce cheap products and export. In this regard, Chinese products have been very competitive in the global market. Therefore the use of the Chinese Yuan has increased to a great extent. This currency has therefore competed to a great extent with the US dollar in the global market. This is due to the fact many products that are currently traded in the global market are sold in terms of the Chinese Yuan.
The other factor that is facilitating the change in the demand of the Chinese Yuan is that china has been financing various projects in many developing countries. This means that there is a need to increase the supply of the Yuan to facilitate these exchanges. These countries usually repay these loans in terms of Chinese Yuan (Brook, 2010). Generally, the demand for Yuan has increased due to its demand to repay the loans financed by Chinese government.
This increased use of the Chinese Yuan has made various economists to predict the future of the currency in various ways. Many have said that in the next decade, the Yuan will have overtaken the US dollar as the reserve currency. This will be similar to what happened when US dollar overtook the British pound. With these predictions, the Chinese leaders have taken various measures to internationalize the Yuan. The leaders have been encouraging the use of the currency in international trade and also between central banks of various countries when it comes to swap arrangements. They have also encouraged the use of the currency when it comes to bank deposits and bonds issue in Hong Kong.
There have been positive results regarding the improvements of the strength of the Yuan. By the mid of 2011, the exchanges made using the Yuan were 13 times the exchanges made using the currency in the previous year. The deposits that were made in banks in form of the currency were 10 times the deposits made in the previous years. Yuan has also been accepted as a means of payment in various countries such as Pakistan, Vietnam and Thailand. This shows the advancement of the currency (Rowan, 2011). The efforts made by Chinese leaders can be seen. These leaders aim at ensuring that the currency is one of the ones that influence the special drawing rights in the international monetary fund.
The weakness of the US dollar has already been seen in the recent past. It is obvious that the central banks of various countries hold foreign reserves to facilitate the import of various goods. It is obvious that many of the imports of various countries come from china as compared to the United States. This means that the central banks of various countries hold the Yuan in large amounts to facilitate the trade transactions (Fredrick, 2011). China has also engaged in financing various countries to implement various development projects. These loans are usually issued in form of the US dollar. However, many financial lenders have insisted that they will be lending in their home country currency. This means that in future, the Chinese government will be lending in the Yuan currency. The other weakness of the US dollar is that its value has been reduced so much in the recent past. This is unacceptable for any reserve currency. The purchasing power of the US dollar has also reduced to by about 4/5. This has been discouraging the central banks of other countries from holding the US dollar. This is as opposed to the Chinese Yuan whose value has been observed to be stable. These observations show that the strength of the Yuan has been improving.
Even though there have been forecasts that the Yuan will overtake the US dollar, this may actually not happen. What is likely to happen is that Yuan is likely to become one of the secondary reserve currencies like the starling pound, the Swiss and the Yen. Replacing the US dollar will be very difficult. In the first place, the strength of the Yuan cannot take place abruptly. The china government has not also showed that overtaking the US dollar is one of the long-term goals of the country. The changes that are necessary to facilitate the strength of the Yuan have caused conflicts and misunderstandings between the policy makers in the country.
Since the aim of the China is to increase the powers of the country, this is likely to lead to various negative effects on the Yuan. In the first place, the competitiveness of the yang in the global market is likely to make various traders and countries to hold the Yuan. The results of this are that the value of the currency will increase. An increase in the value of a currency has negative effects to the country since the exports of the country are likely to be expensive and hence other countries are likely to improve their local industries as compared to china. What this means is that the internationalization of the Yuan will decrease the exports of china and the demand for the currency will decline. Therefore the strength of the currency will decline in future (Fredrick, 2011).
When the exports of china reduce, investment in china is likely to decrease and this will lead to unemployment in the country. This is because the decrease in demand for Chinese products will mean that less production of goods will be required. As a result, the investment in the country will be unattractive and employers will need not some employees. Unemployment in china will decline to the disadvantage of the people of china.
The actions of China government are unacceptable to other countries such as United States due to the fact that it is leading to an increased trade deficit of these countries. It can therefore be predicted that other countries will retaliate and china government will have to change its current policy on exchange rates. This predicts the problems that Yuan may face in future if the system is adopted forever (Sun, 2011). The china central bank will lack the necessary reserve to buy the US dollar and therefore stabilizing the value of the currency will be difficult. The value of Yuan will increase making the China exports expensive and the low exports will lead to a decline in the value of the Yuan.
Generally, it can be seen that the internationalization of the Yuan has various problems and the China government will probably change its intentions of doing so. Therefore it can be argued that even though the china currency is performing very well currently in the global market due to the good economic performance of china, the currency faces a lot of challenges in the near future. The retaliation by the other countries on the policies that china has currently adopted to protect its currency will create more problems to the Yuan. From these observations, it can be concluded that it is difficult to accurately predict the future of Yuan as an international currency. The greater chances are that the currency will become one of the secondary reserve currencies but it is not likely to replace the US dollar.
References.
Fredrick S (2011).The effect of China’s exchange rate policy on US textile imports. michigan journal of business.
Sun, J (2011) Retrospect of the Chinese Exchange Rate Regime after Reform: Stylized Facts during the Period from 2005 to 2010. Institute of World Economics, Chinese Academy of Social Sciences
Brook, T. (2010). The troubled empire: China in the Yuan and Ming dynasties. Cambridge, Mass: Belknap Press of Harvard University Press.
Shirono, K. (2009). Yen Bloc or Yuan Bloc: An Analysis of Currency Arrangements in East Asia. Washington, DC: International monetary fund (IMF.
Rowan, R. J. (2011). Foreign currency financial reporting from Euros to Yen to Yuan: A guide to fundamental concepts and practical applications. Hoboken, N.J: Wiley.
Gitman, L. J., & McDaniel, C. D. (2009). The future of business: The essentials. Mason, OH: South-Western Cenage Learning.
