Seeking a more prominent role on the world stage, China’s central bank has tirelessly promoted the Yuan as a tool for international trade and a future reserve currency. The U.S. has been the world reserve currency since the end of WWII. This factor has greatly protected the currency from outside negative market forces. However, recent threats of default from the U.S. Government has opened the door for a new world reserve currency. China, though also has an uphill battle politically. To convince investors that the Yuan is a safe reserve currency Beijing will need to have three things:
–An independent central bank that can ensure timely and professional monetary policy-making;
–A sound and fair legal system to protect property rights and enforce bankruptcy laws;
– Political reforms that improve the regime’s transparency, accountability and representativeness.
Only time will tell if the Government is willing to permit these things in order to get the Yuan to an appropriate level.
Source: WSJ
I think that the way that China is heading, there is a real possibility that this could happen. The Chinese government seems to be loosening its hold on the economy and attempting to reform its current banking system. While I’m not too familiar with the Chinese legal system, I would not be surprised if it is evolving and modernizing along with the government. While it is unlikely that the Yuan will replace the Dollar as the world reserve currency in the near future, it is most definitely a possibility in the next 15 to 20 years.