China has one of the largest economies in the world, however its currency has not been treated accordingly in the past. However, the European Central Bank has just made an announcement that reverses this trend. The ECB is seriously considering the addition of the Yuan to its currency reserves which is currently made up of the US dollar, the Euro, the Pound, and the Yen. Currently the Yuan is not a widely held currency around the world, but this announcement shows that slowly the Yuan is becoming more internationalized.
This announcement highlights a general trend of liberalization in the Chinese financial system. The president of San Francisco’s federal reserve bank, John Williams, said “After 35 years of amazing growth it’s a natural and healthy next stage for China’s development to liberalize capital markets, to liberalize internal financial systems, and obviously the Renminbi internationalization is an integral part of that.” The prospect of the ECB holding the Yuan in its reserves is a big step for China and shows a promising future for the Chinese financial system and the possibility of the Yuan being openly traded in all parts of the world.
Works Cited:
Reicher, Stefan, Belinda Cao, and Jeff Kearns. “China Welcomes ECB Yuan Debate in Internationalizion Push.” Bloomberg.com. Bloomberg, 11 Oct. 2014. Web. 15 Oct. 2014.
Remember that the ECB’s announcement is not just because of the power of the yuan in isolation, but the shaky situation with the Euro and possibility of deflation in the Eurozone. A stronger test for the yuan would be allowing it to free float.
I feel China has felt slighted in recent years they they haven’t received the same worldwide recognition and esteem as their Japanese counterparts. This is exemplified by China’s attempt to undercut the World Bank and Asian Development Bank with their own proposed Asian Infrastructure Bank which would not include the Japanese.
Does the ECB’s announcement further show China is finally receiving the global recognition they deserve…. in an economic inclusion sense?
For years China was more concerned with building up reserves of other currencies. But as its share of global trade rose, it tried to get major suppliers to invoice in RMB rather than invoice in US$ (which is the norm for most commodities). This is natural.
If you look, there is a bigger issue of what makes for a reserve currency. Will the US dollar maintain its role? The EU’s ascendance appears to have reached its apex, and Japan’s day is past. So will China replace them in our discourse?
Now I don’t think that will happen – there has to be a positive case for why the Chinese RMB will be more useful than the dollar, and also a case for why the dollar is no longer useable, because it’s costly to change reserve currencies. Absent a meltdown of the US economy, the latter won’t happen. Because China is large isn’t enough to lead to their dominance — the primacy of the UK and the pound sterling system lasted well after its direct share of the US economy was eclipsed by the US.