A RECENT report is saying that the Chinese yuan is rapidly coming up as a currency for international trade. If this is true, then we can anticipate that before long, the Chinese yuan will also come as a favored international reserve currency, to surge ahead of the euro, the Japanese yen, the Canadian dollar and the Australian dollar. This development should be of more than passing interest to the two countries concerned and to the rest of the world.
The use of any currency for an international reserve confers upon the issuing country advantages not given to ordinary trading countries: liberation from the penalties arising from persistent current-account deficits and the power to influence interest rates in international financial markets.
On the first point. The desire of countries to hold a currency as an international reserve cannot be satisfied, unless the issuing country agrees to incur an equivalent amount of deficit in its current account. One can even say that such deficit in the issuing country’s current account is made necessary and unavoidable by the desire of the other countries for international reserves.
This is an advantage because, in the normal scheme of things, persistent current account deficits will give rise to a crushing, unserviceable, foreign debt, a shut-off of external sources of finance, a nonconvertible currency, a deterioration of domestic industries, extreme hardships to the population. These, the issuing country can avoid. So long as the rest of the world accepts the currency as payment for real commodities and services, why should the issuing country bother?
On the second point. Domestic interest rates are determined in the main by domestic considerations, but interest rates on international debts are influenced mainly by the interest rate commanded by the reserve currency.
The emergence of the Chinese yuan as a “rival” to the US dollar as an international reserve currency will likely shake up US complacency in dealing with its current-account deficits and put up a brake to its unrelenting issuance of debt to finance imperialist incursions. This development might just trigger a resurgence of US industries that had practically gone in hibernation as the US market saw itself flooded by Chinese-made products, to the good of the American people.
This emerging scenario will also be beneficial to China. China will benefit from a sea of prospective imports from the developing countries, even as it expands its own exports to them.
Most important, this development will be good to the rest of the world’s peoples. Instead of just one principal market for their products, now there will be two. Instead of only one currency imparting stability—the ability to abide by one’s obligations to the international community—now there will be two.
Whether the yuan will replace the dollar as the premier reserve currency will hinge on whether China can serve as the “ultimate consumer” for other countries’ exports as the US has been in the post-World War II period. As we see it, it is not coming anytime soon but it is coming. The Chinese per-capita income of $6,000 as against the American $50,000 may be as distant as Sitio Payong’s per-capita income of P10,000 to Barangay Dasmariñas’s P1 million, but as a totality, the Chinese gross domestic product, whether measured through the “simple” way or through the Atlas method, or by purchasing-power parity, will be able to absorb, sooner than later, all supplies from the developing world, with the yuan serving as the transactions currency, as well as the reserve currency
Image credits: Jimbo Albano