Rise of the Yuan

19 Feb

Three years ago almost no international trade was settled in the Chinese ‘hermit currency’ Yuan as the result of the government’s tight control. In the last months of 2012 however, this has gone up to almost 900 billion yuan ($145 billion), or 14% of China’s trade, due to the Chinese government having initiated steps to promote a growing use of the yuan in international trade and Chinese firms’ foreign investment. What is more, Nigeria has announced that they plan to hold 10% of its foreign-exchange reserves in yuan, and it seems likely that other governments also will wish to diversify their own foreign-exchange reserves by adding the Chinese currency to it.

Although this shows a remarkable rise of the yuan in such a short period of time, it is still very far from in any way challenging the ‘top currency’, the dollar, which is used to settle more than half of international trade transactions, as well as have other countries pegging their exchange rate to it and holding their currency reserves in it. The yuan on the other hand ranks only 14th in international payments.

Nevertheless, it is probable that the yuan’s role in the global monetary system will continue to expand in the decade to come and assume a place of equal importance to global currencies such as the euro, yen and pound. Considering that China now is the world’s second largest economy, it is interesting to consider what a further yuan internationalization will mean for world business. Ideally, a stronger exchange rate and full convertibility would result in a more balanced trade relationship between China and the world, and especially the US.




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