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Posts tagged ‘renminbi’

15
Dec

The Yuan as The World’s Reserve Currency

The most hotly debated topic between the US and China has been the undervalued Chinese Yuan, but an equally important development has been quietly developing over the last year– its internationalization. Having made more than 12 trips to China throughout the last two years, this topic has been by far the one discussed most with various Chinese executives and officials and I believe it will have major implications.

So why is the government pushing the globalization of the Yuan? My contacts tell me that it is due to the government’s focus on quality of growth instead of absolute growth. There are two specific goals: 1) raise the standard of living by getting the Chinese to save less and buy more, 2) increase wages by dramatically increasing the value-add part of China’s manufacturing industry.

A convertible, international Yuan will support China’s growth strategy in the following ways:

  1. It will allow the Chinese to invest their savings at home and abroad. This in turn should boost the rate of return on their savings, and their disposable income, thus increasing their willingness to spend.
  2. It will help China’s economy to balance trade and investment flows, an essential requirement as the economy becomes more sophisticated.
  3. It should lead to the further development of China’s local capital markets and modernization of its monetary policy, including continued liberalization of interest rates. This would also become an effective tool to control inflation, particularly as wages rise.


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