Student Name: RICKY Ricardo
In recent years, many experts were talking about that Chinese Yuan moving toward global currency, because China’s economy increased dramatically in recent 30 years. Another aspect, as the world’s second-biggest economy (BBC, 2011), China government also devotes to improve Chinese Yuan’s position in the world. Furthermore, due to American’s economy in a depression and European Union (EU) are fighting with the financial debts. So many people give a high expectation to Chinese Yuan and suggest that the Yuan turns into a new reserve currency in the world. However, according to the current status, Chinese Yuan do not have the qualification and ability to replace US Dollar as the world’s leading reserve currency in the short-term, meanwhile, nobody can guarantee that Chinese Yuan will not replace US Dollar as the world’s leading reserve currency in the long run.
The reserve currency means that a foreign currency holds by central bank and other major financial institutions as a means to pay off international debt obligation. Arvind Subramanian (2011) said it is an international currency which is used outside one’s own country and foreign government and financial institutions want to use the currency of another country. The three traditional reserve currencies are US Dollar, UK Sterling Pound and Swiss Franc.
In current world, US Dollar has occupied a dominated position since the Second World War. The Bretton Woods System defined the US Dollar as the world reserve currency. Notwithstanding the Dollar’s dominated position downgraded in the past years, it still held the privilege position in the world (The Economist, 2011). It accounts for 60.7% of the world’s reserve currency and its closest rival – Euro – only occupies 26.6% of world’s reserve currency (The Economist, 2011). However, America is now experiencing a bad stage; they have amassed a $14.3 trillion national debt (BBC, 2011), and the unemployment rate reaches 9.0% (Bureau of Labour Statistics, 2011). Moreover, on 5th August, 2011, Standard & Pool (S&P) downgraded the United States’ long-term credit Rating from AAA to AA-plus due to concerning about the USA government’s budget deficit and debt burden (REUTERS, 2011). Due to its weakness performance, many countries including China – that owns $2 trillion US Dollar currency reserve – call for a new reserve currency to replace US Dollar (The Economist, 2011).
The same voice about a new reserve currency also from the United Nations (UN), the UN Conference on Trade and Development (The Telegraph, 2009) said after experiencing the financial and economic crises, the current currency system and capital rules has constrained world economy and suggested a new Bretton Woods-style system to control the exchange rate and central banks should intervene their own countries’ monetary policy according to the world economy.
Many experts recommend using Chinese Yuan as reserve currency because they noticed China’s strong economic strength and high-speed economic growth rate in the past years. There is no doubt that China’s economy makes a huge contribution to the whole world, especially in the global financial crisis period, China’s GDP growth rate maintained average 9% (Chinability, 2010), three times faster than the world’s growth, which amazing all the people. Because the crisis also has a dramatically influence on the world factory’s export. After this crisis, people changed their attitude towards to China. Like the Gupta, ING Investment Management Asia’s CIO, said that “the Yuan will become a reserve currency within the next two years driven by the on-going debt problems in Europe and the US” (Global Pensions, 2011). Two years may be too short to come true, if twenty years, may be it will come true.
Another aspect, people suggest to use Chinese Yuan as...