USD vs Yuan

I believe the world will be better with the SDR (Special drawing rights) which is more of an international system rather than one’s country currency like China’s RMB or the USD.

The idea of a reserve currency is to enable international trade to be undertaken smoothly on a global level, for example, it will enable two countries with differing currencies to be on the same denominator when trading goods. If the exchange rate between two countries are vastly different, it could potentially change the price of goods as well as importing and exporting on a currency that is not circulated internationally enough would be an hinderance to international trade.

It could be argued that the USA will benefit if the USD was a global reserve currency because it provides liquidity for their capital where their financial assets can be priced easily thus making it easier for them to get access to loans however, if the federal reserve do not increase the supply of dollars, American goods will be considerably expensive to overseas markets while, foreign market goods will be more affordable to the American market. Hence, we can see the high consumption of “more affordable” goods being imported into America as there is a consumption demand for them. This trade deficit leads to the rise of major issues such as unemployment like the loss of jobs and lack of job creation which hinders economic growth. According to the world bank, the USA has the world largest surplus at $219 billion (2018) and such imbalances can create friction between countries such as with China who has a trade surplus instead and of whom the US have a substantial deficit with.

Economists argue that in order to offset such imbalances, the world must trade on an equal basis where there is a reasonably equal amount of exporting, importing and consumption. However, a country exporting goods with demand must receive orders from overseas and thus accumulate foreign currency due to the demand being outside its borders. Financial institutions like the banks will see a demand for the exporting currency of that foreign country thus increasing its value. This will allow exporting companies, government and financial institutions to garner wealth (trade surplus). However , the import of more goods from outside a country’s borders than what a county exports can result in a trade deficit  as we can see in the case of the US as most of the money spend on foreign goods ends up on the bank statements of exporting companies in the countries they export from, effectively providing wealth to other countries, hence why I believe an international system is a better off option than one currency belonging to one country.

I do not believe that the Chinese Yuan is ready enough yet to replace the USD, but I believe that it is on its way in doing so. The Chinese yuan has gained 10% against the USD since the beginning of 2017 and is one of the most stable currencies in the trade-weighted basket of currencies according to CNBC. This is to avoid being labelled as a currency manipulator by Trump. This trade – weighted Yuan if it continues to grow substantially, could enable it to maintain its stability in the long-run and thus will be able to have more access to capital they otherwise would not be able to access due to previous capital restrictions. China must strike a balance that will enable their political goals to not hinder their economic plans and trade deals and in order to do so they must compromise with the market-base system of appreciating their Yuan to other stronger currencies such as the Euro or the Japanese Yen as it becomes the world’s second biggest economy. China could push to use more of its currency in regions where it has strong trading partnerships such as Southeast Asia, Africa and even the middle east but it is most likely that the USA will oppose this on an international level. Let’s see how this will all pan out eventually but these are just my thoughts on the matter.

Picture Source:

ccoyne.myportfolio.com

Sources:

https://www.cnbc.com/2015/12/14/new-chinese-trade-weighted-yuan-index-may-spell-more-depreciation.html

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