THIS is a case where theoretical considerations will have to give way to objective realities.
US has a point in saying that the Chinese yuan will have to be made “fully convertible” before it can be included in the International Monetary Fund’s (IMF) special drawing rights (SDR), an artificial currency the IMF offers to supplement nations’ foreign-exchange reserves. Of what use is a currency whose exchange rate is controlled by the issuing country’s government? Where capital-account flows, in and out, are tightly managed by that government? Who would want to hold that currency as its reserve currency when its value is set by fiat rather than by market forces?
China is currently involved in a worldwide campaign to make the yuan one of the world’s reserve currencies, along with the US dollar, the European Union’s euro, the Japanese yen and the British pound. It has enlisted Canada to serve as its launching pad.
Last week it inaugurated the Industrial and Commercial Bank of China Ltd., Canadian unit, in Toronto to begin functioning as the clearinghouse for all China-related transactions, first inside Canada, then inside the US and later inside countries “south of the border.”
It is an audacious move, and the Chinese government is making no bones about it—its ultimate objective is to replace the dollar as the main reserve currency of the trading world.
The yuan is bound to succeed in entering the IMF’s SDR. But whether it can replace the dollar as the reserve currency of choice of trading countries is another matter.
Right now, 44 percent of global transactions use the dollar for settlement and 66 percent of central-bank holdings in the world are in dollars. The yuan’s share in global transactions is 1.8 percent.
The US is pushing a sound theoretical argument, but many suspect the argument is self-serving, since it bestows on the US a high privilege given only to countries whose currencies function as reserve currencies. All that the US has to do is print money to purchase imports, not to produce a surplus in the current account as everybody else must do.
At the same time, realities on the ground buttress the Chinese position. The yuan’s share in total world settlements may be small, but it is rapidly growing.
As matters stand, more and more countries are trading with China, and transactions in yuan are increasing by leaps and bounds. Some observers are already saying that the Chinese yuan will weigh in more heavily than the Japanese yen and the British pound if the SDR is recalculated.
Meanwhile, IMF Managing Director Christine Legarde is saying that China’s admission into the SDR coterie “is only a matter of time.”
What is the significance of all these to the Philippines?
For one, we can increase our reserves in yuan on the ground that a broad base is superior to a narrow one.
But we must set up safeguards so that the value of what will be our yuan reserves does not become hostage to Chinese government manipulation.
1 comment
But the US dollar is also a fiat currency just as every other currency is since all currencies were delinked from gold n silver.
We are already at the mercy of foreign currency. The yuan will just be one more in the list.