Expert in financial institutions
Head for the yuan!
Julkaistu: 12.10.2011

Head for the yuan!

The yuan. Opinions vary. Will it destabilise the world economy or rescue it? The majority of economists and bankers agree that the crisis is here. They explain it, consider the issue in all its aspects, and even discuss the consequences. But alas, they have no advice to give. The structure of financial markets is outdated, and it is an indisputable fact.

The American dollar serves the cornerstone of this structure. The U.S. dollar remains the main global reserve currency. Since the Bretton Woods Conference in 1944, the dollar has come a long way. During the last 10 years, more than 60% of official foreign currency and gold reserves in the countries of the world were in American dollars.

Meanwhile, the yuan, or rather China’s exchange rate policy, is becoming America’s eyesore. It is considered that China artificially lowers the rate of the yuan for 10–30% to make a more comfortable environment for Chinese exporters capturing foreign markets. The steadily collapsing U.S. are actively promoting a bill, which would allow the White House to impose countervailing duties on products from countries found to be undervaluing their currencies. China warns that it could lead to a trade war. Accusations from the U.S. were supported by European countries: crisis regions are joining their forces to oppose a fast growing market.

A reserve currency is meant to secure payments throughout the world. Notably, it must be a currency backed by an economy with globally competitive goods. It is known that China is the world leader in export volumes and the second largest in foreign trade volumes. For now, the yuan cannot be converted freely, and that is a serious obstacle. But the main thing is that Chinese authorities are not seeking to make the yuan a freely convertible currency. For the farsighted Chinese such a step is unprofitable. A higher yuan would negatively impact Chinese exports, a base for the country’s growing economy. Therefore, the yuan will become a global reserve currency only when the empire under the skies is completely sure in its economic hegemony. We speak about a global reserve currency now, as de facto the yuan has already turned into a reserve currency in the ASEAN region.

Probably, the process of the yuan’s strengthening will come hand in hand with the dollar’s departure. Still, one should hardly expect this trend in the nearest future. We shall witness it not in a couple of years, but rather in a decade.

The trend discussed has a key role, and that is important. It is worth noting that not long ago foreign investments went to China, and now they have reversed their direction amounting to $58 billion during 2010.

In 2010, German investments in Chinese enterprises comprised slightly more than Euro 1.8 billion, while Chinese businessmen poured about Euro 900 million into the German economy. And this is only the beginning, experts assure.

The interest of Chinese investors in Russia is soaring, and the interest is clearly mutual: Beijing becomes the main partner of Russia. In 2011, the bilateral trade is expected to reach $70 billion.

On October 11, 2011, Russian Prime Minister Vladimir Putin arrived in the Chinese capital for a working visit, during which he sought to discuss economic cooperation. Thus, during the no-remedy crisis Russian business may set hopes on Eastern support. And this is the right path to follow.

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