When business people realize that the yuan is buttressed by giant production worth $39.5 trillion and the powerful Chinese economy, the yuan will start to function as a reserve currency. This will first take place in the region and then on a global scale.
Ten years ago, the Chinese yuan's role in the world – let alone in East Asia – was not even on the agenda. Only two currencies – the U.S. dollar and the Japanese yen – were seen as a potential reserve currency for APEC and the region.
Bu the yen became irrelevant as time passed. And the huge national debt of the United States has led to doubts regarding the dollar. In the meantime, the yuan has gradually gained ground. However, it is not fully convertible, which prevents it from gaining the status of a single reserve currency on the regional or global scale.
Paradoxically, China does not want its currency to become fully convertible. It does not want to be responsible for the debts of other countries. China is content with the status of its currency – partial convertibility – as well as its influence on a specific region in Asia, notably China and a free trade zone in Southeast Asia.
China is not doing much to increase trade with Russia in either country's currency – the ruble or the yuan. In effect, they are still using a third currency in their bilateral transactions, although ruble-yuan trading launched last year on the Moscow Interbank Stock Exchange (MICEX) in December.
It seems that under these circumstances, China will support advancing its currency in the ASEAN+China zone. Beijing is orienting itself around the U.S. dollar for the time being, while the dollar is prone to the occasional decline. The rate of the Chinese yuan is more or less stable.
Prominent economist John Ross has pointed out that, in terms of economic effectiveness, the Chinese economy is ahead of the United State's. While the Dow Jones index fell on the New York Stock Exchange and shareowners sustained losses, the shares of Chinese companies remained profitable on the Chinese stock exchange. This shows that the Chinese market is appealing to investors. Indicatively, there are fewer investors on the market as China restricts the revaluation of its currency.
A top official at the People’s Bank of China said less than a month ago that if China sharply reevaluates the yuan, the country will be flooded with speculative capital, which would not be in the economy's best interests, as progress would be slow, and would not contribute to building a comprehensive welfare state, he said.
The official said Beijing will make the move gradually, and developments in this sphere should only occur while taking into account changes across the globe.
The yuan rate is 6.28-6.33 per $1. However, this does not reflect the yuan’s purchasing power, as it is higher in reality. The yuan is even higher if one considers purchasing parity. When studying total GDP and taking into account purchasing parity in current prices, as British economist Angus Madison did, it becomes clear that China has already matched the United States. This is especially clear in terms of purchasing parity at 1999 prices.
There is another significant issue linked with GDP structure, which takes into account the first, second and third sectors. The second sector prevails in China as it produces real commodities not just securities and unidentified services. However, Beijing considers it important to develop the third sector as well, as its share has determined the further modernization of the Chinese economy, new technological development and high-tech commodity production.
Taking into account all of these factors, the Chinese yuan will gradually oust the dollar. It will take China years to make its currency fully convertible and start selling products for yuans. However, once it starts selling goods for yuans, the process will gather speed.
The recent events in the Eurozone illustrate the potentialities of the Chinese yuan. Some time ago, China conditioned its assistance to Europe on a number of issues summed up by Deputy Foreign Minister Fu Ying's statement: “If you emit Eurobonds, then we will buy them from you for yuans.” Europe refused.
This was probably the right decision. However, it is important to remember that those yuans could also open the door to the A market, which is still closed to foreigners. They are not allowed to buy the shares of companies sold for yuans. The sale of Eurobonds for yuans was a chance to gain access to China’s closed market.
There is one other important issue. The Chinese national currency does not account for the mandatory reserves of central banks, including in Russia, which is a source of doubt. There is no mandatory requirement to stock the currency of this country, which ranks second globally in terms of foreign trade and first in terms of currency reserves. This is a market aberration that creates an obvious contradiction.
With the gradual removal of this contradiction and China’s switch to the fully convertible yuan, and China’s increasing sales for yuans, it will be possible to discuss a transfer to the yuan as a reserve currency.
Let’s see what is happening in Russia. Russian companies are not rushing to buy yuans or to sell their goods for yuans. They are continuing to stock up currency. Only business people in the Far East know that they can buy products cheaper for yuans than dollars.
When business people realize that the yuan is buttressed by giant production worth $39.5 trillion and the powerful Chinese economy, the yuan will start to function as a reserve currency. This will first take place in the region and then on a global scale. However, one or two decades will pass before this happens.