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The Dilemma for the Chinese Yuan to be world's leading curre

时间:2012-09-13 19:29:31 来源:www.ukthesis.org 作者:英国论文网 点击联系客服: 客服:Damien

Introduction


As the effect of the subprime mortgage crisis hasn't been eliminated completely, the world's economy relies more and more on the growth of the Asian economies, especially the leading Chinese economy and its currency. It won't be a surprise that Chinese Yuan would start its globalization process, as indicated by the bond issuance this August in Hong Kong. It will be an important issue to discuss whether the  Chinese Yuan has its ability and capacity to be one of the world's main reserve currency, or even the world's leading currency. This essay will firstly discuss the development of the Chinese Yuan worldwide in the past few years, which would explain the temptation behind for the Chinese Yuan to be the world leading currency. Following this, further analysis would be implemented to demonstrate why it is not practical to replace the US Dollar to be the world's leading currency in the short-term. Finally, opportunities will be thoroughly analyzed to demonstrate the current situation that Beijing is facing. A dilemma would be disclosed, as the Chinese Yuan is facing its temptations, challenges and opportunities on the way to be the world's leading currency.


From Chinese Yuan to World's currency: the temptation implicated in globalization
The first step of the Chinese Yuan's globalization has been made eventually, under the enormous temptation to go to the world. It is common for the China's Ministryof Finance to issue bonds in the mainland, but not common in Hong Kong, especially in its own currency, the Chinese Yuan. This event has been much notable for its size, which is nearly 20 billion Yuan. As another important remarkable event for Chinese Yuan, a notification was issued by the State Department of Commerce at October 15, which clearly marks that the Foreign Direct Investment in Chinese Yuan has been approved by the authorities. These two remarkable events have declared the globalization of the Chinese Yuan has been officially started. Hong Kong, the former colony of the British, has been assigned to be the first location to promote this ambitious program(Lingling Wei, 2011). After the Beijing Olympic Games, people worldwide have been some kind familiar with the Chinese people, as well as its currency. Now the subprime mortgage crisis hasn't been eliminated completely, the USD has been continuously weakening, so it is a chance to start the globalization of Chinese Yuan at this time. But the most important motivation for the Chinese Yuan to go to the world is the benefit from globalization. The globalization of a currency would ease the inflation pressure within its nation, and furthermore, would take advantage of the natural resources all over the world. That is exactly what the U.S. government has been doing for more than half century.


Challenge the USD: mission impossible in the short term#p#分页标题#e#
However, it has never been easy to be the world leading currency, especially in the current situation. The US Dollar has been the world leading currency since the World War II absolutely, with not a single challenger. The Euros could be a qualified challenger, after the European Union was established and the Euros were used in 2002, not to mention its current debt problems(David Lee, 2009). As the Chinese economy has been rapidly growing after 2001, the Chinese Yuan could be a potential challenger against the current leading currency, USD, but all this has not been confirmed by the investors and companies worldwide. The current step of the Yuan's globalization is still in Hong Kong, and the bonds are purchased by institutional investors, not the import & export companies, not the contractors worldwide, or not even the financial service companies from the western world. It is hard to image that a currency would be leading the world before it has become one of the world's popular settlement currencies. The Chinese Yuan is trying to be, but it hasn't.


Another barrier on the Yuan's way to be the leading currency is crucial, that the Chinese government seems to be cautious on the internalization issue. "We are cautious about the concept of the so-called internationalization of the RMB (Yuan)" said Guo Qingping, vice governor of the People's Bank of China. "Whether a currency becomes an international currency is not up to a specific country, but is up to the market." It is true that the Chinese government has been eager to push the Yuan to the world, even a little bit aggressively, but they also clearly demonstrate their cautiousness and prudence. This vice governor of People's Bank of China also listed several obvious reasons to declare the difficulties that Yuan is facing on its road: "First, the economic competitiveness of the currency, and second, the financial market of the country in question have to be very powerful and developed - and the currency itself has to be convertible. Third, the environment in which the currency is used should be stable." The Chinese government is well known about their situation and assess precisely on their own capacity, not to mention the high inflation rate and the obvious bubble in the real estate market for the recent years. If the domestic economic environment freezes suddenly, the asset value would decrease rapidly, which would raise the interest rate and finally cause the flow back of the Yuan. This could be a potential challenge for the Chinese authority to consider on the way to internationalize the Yuan. This is analysis from the Chinese authority's view.


Subsequently, it is hard to find committed reasons and reasonable capacity for the Chinese Yuan to combat the USD. Just as what Henry Paulson, the former U.S. Treasury Secretary had said in BOAO, Hainan, "To me a reserve currency has got to be one that is liquid and is convertible and whose value is determined by the markets, not by governments."(Anonymous, 2011) He mentioned an important point that the Chinese Yuan is not freely exchanged even in China, and the exchange rate is determined by the government, not by the market. It has been an important reason for most investors to dismiss the option that Yuan could be the leading currency soon. In Mr. Paulson's opinion, the Chinese Yuan is even hard to be a component of the Special Drawing Rights of the IMF, because the significant liberalization hasn't been realized, and the Chinese Yuan is still under tightly control. On the other hand, although the US Dollars have been continuously weakened for a long period, but it has been most widely accepted currency worldwide, and its fundamental basis is still solid: the credit of the Federal Reserve and the government of the United States. Furthermore, although the U.S. economy was negatively influenced by the subprime mortgage crisis, the most important support for the US Dollars is not the financial sector, but the advanced technology and military force of the States, which is hard for the Chinese government to combat in the foreseeable future.#p#分页标题#e#


Finally, the Chinese Yuan overseas investment channels are limited. As we all know, offshore Yuan-denominated financial products market is still relatively small.It is up to capital account in China not yet fully open and Investment inertia people have.


Opportunities implicated in this post-subprime-crisis period
Generally, there are three potential opportunities for the Chinese government to take in this post-subprime-crisis period. The first is the strong growth of the Chinese economy. The China's State Bureau of Statistics has recently issued the GDP data for the third quarter, which has increased by 9.1 percent, still far more than almost all the western countries. This could be a strong backup for the Chinese Yuan's globalization, just as what the U.S. government has done after the World War II.
Another opportunity that the Chinese could take is the rapid growth in business with neighbor countries, such as Russia, Shanghai Cooperation Organization members, BRIC, and some other South-east Asian members. In fact, the Chinese Yuan has been listed Moscow Inter-bank Currency Exchange in December 15, 2010, which means Chinese Yuan can be converted to Ruble directly, without the former intermediary: the USD. This is an important and actual step to shake the leading position of the USD. If the Chinese government accelerates this process and promotes this method to all the neighbor countries, the effect would be enormous, and by that time, the Chinese Yuan would be the leading settlement currency in South-east Asia, which would be far more closely to be the regional leading reserve currency than now. A piece of supporting news comes from Kazakh, that it is said that Kazakh National Bank may convert some reserves to Chinese Yuan. If it is true, then it would be an actual move in Yuan's globalization. As the central bank's chairman, Grigory Marchenko, said at a press conference in Almaty, "To be part of our international reserves the Yuan must be recognized internationally as both a hard http://www.ukthesis.org/dissertation_writing/ currency and a reserve currency. There are many discussions on that topic. The IMF position is that it must be done, but it takes making certain changes. We believe the changes will take place this year. If it happens, then part of our gold and foreign currency reserves will be converted to Yuan." on the other hand, it is said that Philippine C. Bank has considered Chinese Yuan as a possible reserve currency. Another piece of exciting news is that it is reported by the BBC that the French president has agreed to push for Chinese Yuan's inclusion in the IMF reserve fund. "The group will discuss, and propose under what conditions and in what form the Yuan could be part of the special drawing rights." He said, speaking through a translator. As we know that the SDR is an international reserve asset, created by the IMF in 1969 to support its members' official reserves. It is a synthetic currency currently composed of the USD, the Euro, the British Pound, and the Yen. SDRs can be exchanged for many other kinds of currencies. They can be also held by various central banks and many other financial institutions to pay off global debt obligations, or to adjust their domestic exchange rate from many aspects.#p#分页标题#e#


The last opportunity to take is to take advantage of the international financial center: Hong Kong. According to the Wall Street journal, government officials and regulators at the Hong Kong Monetary Authority and the Securities and Futures Commission have been making significant efforts to prepare services and products denominated in Chinese Yuan(Jonathan Cheng, 2010). Hong Kong, developed from a small fishing village to the important international financial center, has returned to China for more than one decade. It would serve like a bridge connecting the mainland China and the rest of the world. It has the advanced market economy and all-covered legal institutions. It is the earliest place that the western people and investors are familiar with. It is a great place for the Chinese Yuan to start its globalization, just as what has happened, and it must be the cash pool to back up the Yuan's road to the entire world.


Conclusion
Conclusively, the Chinese Yuan is facing a complex situation on its globalization road. In a short term, it is not rational to expect Yuan to be the world's leading reserve currency. Although there is a great temptation, or even enticement for the Chinese Yuan to be the world's leading currency, it also faces many challenges, the most important of which is to give solid reasons to convince the world and to beat the US Dollar. For the former one, it is hard to expect Chinese Yuan to be the world's leading reserve currency before it becomes the world's leading settlement currency; for the latter one, although the U.S. economy exhibits negative outlook in the short-term, but its currency has one of the greatest national credit to backup, and it has been flowing all over the world, for trading and investing activities. After the European debt problem happened, it is still one of the most popular currencies over the world. Finally, the Chinese Yuan does face some opportunities, as the analysis above. China has been developed rapidly since it was involved in the WTO in 2001, only with slightly slow down recently. During this decade, China has become the largest exporter in the world, products made in China has gone to many families. It does have some opportunities to challenge the current leading currency, but definitely needs some time. In the foreseeable future, unless the  fundamental basis of the U.S. has rapidly deteriorated and the current structure of the financial markets has changed greatly, the Chinese Yuan would not shake the USD position. It is exciting and ambitious for the Chinese Yuan to go abroad, it does benefit the Chinese people and even the entire world, but it does need time. In the short term, it is impossible for the Chinese Yuan to be the world leading reserve currency, but in the long term, it exhibits a positive outlook and it relies on the political and economic structure between China and U.S. The result would be uncertain, but curious to be seen.#p#分页标题#e#


Reference:
Lingling Wei, 2011. China Shows Its Growing Might --- New Move to Make Yuan a Global Currency. Wall Street Journal. (Eastern edition). Jan 12. p. A.1
Anonymous, 2011. Views Diverge on Yuan's Potential as a Global Currency. Wall Street Journal. (Eastern edition). Apr 16. p. A.7
Jonathan Cheng, 2010. Hong Kong Prepares for a Yuan World. Wall Street Journal. (Eastern edition). Feb 22. p. C.7
David Lee, 2009. China takes efforts to make Yuan a world currency. China Business News. Aug 31. p. A4

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