When Will the Yuan Replace the Dollar?

By Shlomo  Maital


 Most of the world’s foreign trade and foreign investment is still done in dollars.  Perhaps 80 percent or more of transactions on the London foreign exchange market, still the world’s biggest, involve dollars.    

  For the global economy, this is a problem.  America’s economy is weak and unstable, hence so is the currency – and the currency is not just America’s money, but it is the world’s, so when America has a problem, so do we all.  As the U.S. Treasury Secretary once said, the dollar is our currency – and your (the world’s) problem.

   With China’s economy now the world’s largest, by some measures, it makes sense that the Chinese currency, the renminbi (ren – min – bi,  ‘money of the people’) should take a correspondingly important role in world trade and finance.  But China has been unwilling to loosen its tight control of the RMB, because the undervalued exchange rate, around 6 RMB per dollar, provides strong advantages for exports.   Since 2005, though, China has been gradually (everything China does is gradual) loosening control of the RMB (that was the year it dropped the fixed ‘peg’, or fixed exchange rate, and let the RMB slowly slowly gain in value) and since 2009, it has loosened restrictions on yuan trading outside China. 

    Now, according to the Wall Street Journal, more and more American firms are paying for Chinese goods in RMB (yuan).  Ford Motor Co., for instance, has reacted swiftly to the China’s government easing of restrictions on use of the yuan by global companies.  There are big advantages – if you can pay directly in yuan, you can save substantial trading costs.   

  U.S.-China trade totals $500 b.  America has been pressing China for years to let its currency appreciate more, reflecting its true value, and making Chinese exports more expensive.

    According to the B.I.S. (Swiss-based Bank for International Settlements), the Central Banks’ bank,  the yuan is the 9th most traded currency in the world. 

    Ninth is very far from first. But look for the yuan to move up in the World Cup forex rankings.   There are big opportunities here for experts in forex and financial services.   Japan, for instance, doggedly resists making the yen a global currency, by imposing restrictions on foreign currency movements into and out of Japan.  I believe this was a big mistake.  China seems about to avoid Japan’s strategic error.