Could the world’s currency of choice have the face of Mao Tse-tung on it, not George Washington?
Quixotic or not, the Chinese are preparing for that day.
In a series of what might be called baby steps, Chinese officials recently have moved to globalize the yuan and promote its influence overseas, with Shanghai designated as command central.
Since last December, China has signed deals with six countries, including South Korea, Malaysia and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to pay for goods they import from China in yuan, bypassing the dollar -- the currency that dominates international trade and finance, including foreign exchange reserves.
Beijing is also taking initiatives to use the yuan, also known as the renminbi, to settle trade accounts between some Chinese provinces and neighboring states, starting with Hong Kong.
“The central bank has set promoting the renminbi for payment settlements as the main task for this year’s work,” said Shi Lei, an analyst in the global financial markets section at Bank of China in Beijing.
China is also spreading the yuan’s influence in Asia by making loans and investments in other countries, as well as through its many tourists who carry loads of Chinese currency abroad. In Cambodia, where the dollar has long dominated, a tour guide in Angkor Wat recently asked visitors if they could pay him in yuan.
Meanwhile, Chinese officials have called attention to the risks of an international monetary system that relies on the dollar, which many analysts have begun to see as unstable because of heavy deficit spending embraced by Washington to combat the recession.
China’s central banker last week called for the creation of a new global currency, although he didn’t propose that the yuan replace the dollar. The idea was quickly dismissed by some U.S. and Western officials, and it didn’t get much attention at the Group of 20 summit Thursday in London.
Still, Kirby Daley, a strategist in Hong Kong for brokerage Newedge Group, said: “I think these are very, very shrewd moves” by the Chinese. “The timing is really good.”
Daley and other experts say it would take years for the yuan to supplant the dollar; the Chinese currency is currently tightly controlled and not even freely tradable in international markets. It will take time for the yuan to gain international acceptance and for China to reform its capital markets and diversify its economy, crucial preconditions before the Chinese can elevate their currency to rival the dollar.
But given the risk of inflation diminishing the value of the dollar, and neither the euro nor the Japanese yen viewed as attractive alternatives, Chinese and Western analysts say they can envision the yuan becoming the dominant global currency by 2020. That’s when Beijing expects the yuan to have been fully liberalized, institutional arrangements and rules to have been set, and Shanghai to be firmly established as an international financial center.
“That’s a reasonable timetable,” said Tim Condon, chief Asia economist for ING Financial Markets in Singapore, adding that the outlooks for the U.S. and Chinese currencies go in opposite directions. “I see undesirable risk against the dollar and appreciation pressure on the Chinese yuan.”
For the Chinese, that’s not necessarily a good thing at the moment. China holds about $2 trillion in foreign exchange reserves, about half in U.S. Treasury bonds and other government-backed debt. A weakening dollar would erode the value of those investments. Yet any sudden or large move to shift those funds could destabilize the dollar and cause just such a scenario to unfold.
At the same time, the yuan is widely thought to be undervalued. American manufacturers and politicians have long complained that China manipulates its currency to boost exports. By keeping the yuan’s value artificially low, critics say, China enables its manufacturers to sell their goods more cheaply in overseas markets. If the exchange rate -- currently pegged at 6.8 yuan to the dollar -- weren’t tightly set by Beijing, even Chinese analysts figure the ratio could drop to 5 yuan to the dollar.
Given China’s heavy reliance on trade and related investments for growth, Beijing can’t afford to let the yuan appreciate too quickly. To reduce those risks, it needs time to continue to grow its economy and transfer more of its economic output to services and the domestic sector.
A shift from the dollar to the yuan as the global currency would have significant practical and symbolic consequences. The dominance of the dollar in trade, financing tools, commodity pricing and international payments has given the U.S. a big advantage in driving commerce and funding the running of the country, although that’s also allowed Americans to spend more than they produce and save.
Psychologically, the unseating of the dollar would send a signal that the U.S. is losing its stature as the world’s supreme economic power.
Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, cautions against getting too excited about the central government’s recent moves, including the announcement last week that Shanghai would be built into an international finance hub. He says there’s a long way to go before the yuan can become an international currency.
At the moment, the yuan is traded in the open market in only a few small countries such as Romania. “It’s not so meaningful to talk about this right now, when the renminbi is not yet convertible,” Yi said.