Yuan to become global currency

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In the 19th century, the British pound was the dominant currency. In the twentieth century, tikw as the greenback. We are now seeing China’s yuan moving into the ascendency.

China’s devaluation of the Renminbi (yuan) came as a surprise to many observers. At the start of the week, the People’s Bank of China debased the yuan 1.9 per cent against the US dollar. That was followed up today by another 1.6 per cent devaluation.

This was important because until now, the yuan had been pegged to the US dollar. Now the People’s Bank of China (PBOC), acting on the instructions of the Chinese government, were letting market forces take over.

Why? Because this devaluation is latest step in the yuan’s ascendency towards reserve currency status. China has ambitions to join the International Monetary Fund’s (IMF) basket of currencies. The so-called Special Drawing Rights (SDRs) are long touted as the long-term replacement for the US dollar’s hegemony over global finance. China wants the yuan to replace the US dollar’s control over markets.

As Bloomberg tells us, IMF requirements that reserve currencies must be freely usable played a role in the PBOC’s move, according to Commerzbank AG. The IMF  keeps saying that the yuan needs to be more flexible. It needs to be unpegged from the greenback. Hence the devaluation.

“The yuan exchange rate will be more market-oriented going forward,” Zhou Hao, an economist at Commerzbank in Singapore, wrote in a report. “Volatility of both the onshore and offshore rates will pick up significantly.”

YaleGlobalOnline maintains that any inclusion of the Renminbi is centred in demonstrating China’s status as an equal among world powers, arguably a superpower, to the rest of the world and especially to Chinese citizens. In any case, the yuan is still loosely pegged to the dollar.

But that’s the case for now. The ground is shifting. What we are seeing is the start of China’s complete integration into the global economy. Until now, the only bit of China’s economy that was integrated into the global economy was the trading of goods and services. We can now expect to see China’s financial system play a greater role with greater trade of the yuan in currency markets. The yuan will become the new global currency.

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