Sunday, May 12, 2013

Is the Chinese Yuan set to replace the US dollar?

n the aftermath of the global financial crisis, the status of the US dollar as the world's reserve currency has increasingly come into question. Reckless money printing practices by the US Fed has undermined the value of the dollar as many countries have looked to diversify their assets into other currencies. 

The question then remains is which currency can take over from the US? Despite the crippling debt and weak fundamentals in the US, one of the reasons why the dollar still continues to find weight is because other countries have their share of issues as well. And so the dollar's strength is more relative. But there have been talks that the Chinese currency Yuan can stake a claim to the mantle currently donned by the dollar. 

One of the reasons why this seems likely is the tremendous pace at which China has grown in the recent past and become a force to reckon with in the international arena. Further, as per an article in Firstpost, if China eventually opens its capital market in the next 5 years, its progress as an international currency will be ensured. It will have big implications in countries around the world including India whose ambitions to become fully convertible on the capital account appear a dream at best. 

But all is not hunky dory for the dragon nation. One of the reasons why the US dollar is said to be losing value is because of the massive debt that the country has amassed. And in this regard, China does not fare well either. Indeed, as per the article, China has resorted to debt to fuel growth as a result of which the current level of debt stands at around 205% of GDP. What is more, More than half of that debt was piled on in just the past four years since the 2008 global financial crisis. Further, China will have to ease its capital controls; something which the very structure of its political system may not allow to happen. 

So as far as paper currencies go, it appears that the US dollar will enjoy dominance for some more time to come. But given the kind of economic problems most countries across the world including the US are facing, maybe the right question to ask is whether paper currencies as a whole will lose relevance in the distant future? 

Do you think that the Chinese Yuan will replace the US dollar as the world's reserve currency down the line?

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