Yuan Growth- Where Now For Chinese Currency? - Eaglesinvestors

For the past years, the U.S dollar has dominated as the world’s most used currency with two-thirds of the world allocated foreign exchange reserves held in U.S Dollars. But, this seems to shift as the Chinese yuan growth is in prominence in the European market.

There are many ways in which China can take center stage in the world, and this includes boosting foreign aid, developing advanced technology and promoting globalization. In doing so, China is on the verge of trying to internationalize its currency.

However, China still faces several challenges in having a truly international currency. A lack of regulatory transparency and capital controls make financial institutions reluctant to invest in Chinese assets.

But, for China to have an international currency; it will have to relax some of its financial controls and improve financial transparency; which would allow for the Chinese market to open up further foreign investment.

Yuan Growth

China has chosen to use its currency yuan in bilateral commerce and trade instead of using the American dollar; which has dominated the international financial markets for many years.

The US Dollar is the worlds leading reserve currency, but it isn’t the only one. The euro, British pound, Japanese yen and also Chinese yuan are up there with it.

There is some economic value for the dominant currency because it is convenient for banks and firms to do cross border business in their currency. Therefore, this can be done while the government can borrow at a lower cost due to additional demand for Treasury securities as reserves.

While some of the US policies push the US Dollar out of the international limelight; many investors expect China to fill the gap, including in world finance. In other words, the US dollar will use its dominance; and multiple currencies will coexist in an equal footing in international markets.

Can Yuan Replace the U.S Dollar?

Most of the investors who want to invest in Asian markets ask themselves this question. One of the primary reasons why the yuan can replace the US Dollar as the dominant currency is the stability of yuan.

One can say, the steady economic growth of China for the past years has almost proven its currency yuan a safe and stable currency to invest in. However, people argue that the euro, yen; British pound could serve as a strong currency that can be the dominant currency as well.

Moreso, now that China is catching up with a stable economic growth that placed itself second after the U.S; the chances of its currency may progress to a point where it substitutes the U.S Dollar as a global currency.

If the yuan growth continues at its current pace; it is possible that China’s economy could surpass the United States within two decades. So, there is a strong reason to believe that Yuan can replace the U.S dollar and dash in the big league on international currencies.

Conclusion

As most central banks hold their reserves in dollars; a shift to yuan or any other currency will impact the dollar adversely. Over the coming years it is likely that the dollar will lose the dominance it has enjoyed up till now; instead, it will share the dominance with other currencies such as the yuan and the euro.

Therefore, I believe that yuan could serve as a potential hedge against the U.S dollar as the dominant currency to the world.

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