The Chinese Renminbi – The New Global Currency
The world economy is already
tripolar—comprising the US, EU, and Asia.
There are three main international currency in
global trade, that are US dollar, Euro, Renminbi. The US dollar maintained
currency hegemony for 60 years mainly because no alternative asset was as
attractive. And the euro has grown to become an international currency from
being a simple consolidation of fragmented national currencies. The eurozone economy
is roughly the same size as the US one and accounts for a larger share of world
trade. The euro has emerged as a credible alternative to the dollar, and is a
useful second reserve currency held by many of the world’s central banks.
However, the future of the euro as the world’s next primary reserve
currency—replacing the troubled US dollar, has been compounded by worsening
financial crisis in the eurozone in recent years.
The obvious candidate
for a new international currency is the Renminbi. With the China’s growing
weight relative to the world economy, the nation that the Renminbi will become
the key currency in Asia and holds promise to become a new international
reserve currency over the long run is widely shared. In light of the PRC’s
large and growing influence in the global economy. If it continues to maintain
rapid growth, the People’s Republic of China (PRC) is set to overtake the US as
the world’s largest economy within a few decades.
So, why is the USD can
be international currency for 60 years?[1]
First, it starting from the Bretton Woods agreement after World War 2; is using
gold as a global standard of the currency. At that time, the state of world
economies except the United States, devastated by war. This causes them to rely
on loans granted by the United States. These loans are given in U.S. dollars.
As collateral, the American-have got the gold from these countries. Thus, the
American master of all the gold in the world would automatically and only the
U.S. dollar whose value is backed by gold. The implication, any country to
build foreign exchange reserves in U.S. dollars; Dollar reserves necessary for
the concerned country's currency can be exchanged for dollars or gold.
Second, to become an
international currency needs a strong owner, a powerful state. Therefore, it
takes a country which has economic and political situation is stable, because
as an international currency is needed the confidence of the world so the world
use it. The U.S. dollar became the currency of the world believed, because the
condition can be predicted that the country will be stable in the long run.
Third, the US also had a small budget deficit and was transforming itself into
a leading exporter; its level of debt was also relatively low in comparison to
other countries.
However, many experts
predict that dominance of US dollar will collapse or replaced. There are 10
reasons why the triumph of the US dollar as the currency of the world will end
soon[2].
1.
China
and Japan get rid of the dollar
China
(the second largest economy in the world) and Japan (the third largest economy
in the world) announced plans to promote the direct exchange of their
currencies. This is an effort to cut costs for companies and increase bilateral
trade.
2.
BRICs
plan is using your own currency
BRICs
group (Brazil, Russia, India, China, and South Africa) are promoting the use of
their own national currencies instead of using U.S. dollars in trade with each
other. News of the media in India said that five principal developing countries
(BRICs) encourage greater economic momentum to their groups through the signing
of two treaties to promote intra-BRICs trade in the fourth summit of their
leaders in Jakarta.
3.
Exchange
agreements with Russia and China
Russia
and China have been using their own national currencies in trade with each
other for over a year. The leaders of Russia and China strongly recommends the
establishment of a new global currency for several years. Both countries seem
determined to destroy the power of the dollar in international trade.
4.
Rising
use of Yuan in Africa
Three
years ago, China has become Africa's largest trading partner. China is now
aggressively trying to expand the use of the Yuan or Renmimbi, the Chinese
currency, the Dark Continent.
5.
Agreement
China- United Arab Emirate
China
and the United Arab Emirates agreed to get rid of dollars and use their own
currencies in oil transactions with each other. UAE is a small player, but this
is clearly a threat to the petrodollar system.
6.
Iran
Iran became one of the
most aggressive country away from the U.S. dollar in international trade. For
example, India will use the gold to buy oil from Iran.
7.
Partnership
of China and Saudi Arabia
Saudi Arabia and China
work together to build a major new oil refinery in Saudi Arabia. The leaders of
both countries have been aggressively working to expand trade between the two
countries. China imported 1.39 million barrels of oil per day from Saudi Arabia
in February, up 39 percent from a year earlier.
8.
United
Nations encourages the formation of a new world currency
United Nation issued a
report which openly calls for an alternative to the dollar as world currency.
UN report says, "a new global reserve system" in which the U.S. no
longer has dominance. "A new global reserve system can be created, which
is no longer dependent on the U.S. dollar as the single major reserve
currency."
9.
IMF
proposes Bancor as the new currency
One document of IMF
entitled "Reserve Accumulation and International Monetary Stability"
published some time ago actually proposed a global currency future that is
named "Bancor".
10. Most of the world hate the united states
Global sentiment
toward the United States shifted dramatically. Several decades ago the U.S. was
one of the most beloved nation on Earth. But now they are one of the most hated
nation.
Many predictions said
that the triumph of the dollar will collapse, the Chinese government issued a
policy to strengthen their currencies. China seems to have entered a new phase
of economic activity in structural terms. China not only has a population now
of nearly 1.4 billion, representing around 20% of the world’s population but,
as of 2010, it generated nearly 14% of global added value (adjusted for
purchasing power). The fact that the China exports a diverse mix of
manufactured goods to virtually all countries reinforces the role of the
Renminbi/Yuan as a medium of exchange. And growing China overseas investments
further increases its influence on the world economy.
In addition, the China
has achieved macroeconomic stability in recent years. Inflation has been low
and stable, averaging 1.9% during 2000–09. Its fiscal balance has been healthy,
with a deficit averaging 1.6% of GDP over the same period. The government
places high priority on macroeconomic stability, and this bodes well for the
Renminbi/Yuan as a store of value. Furthermore, at USD 3.2 trillion China also
had the world’s largest foreign currency reserves as at the end of 2011. Of
this amount, nearly USD 3 trillion has been accumulated in the last 10 years
alone. In other words, China’s foreign currency reserves are rising by more
than USD 14,000 per second.
Moreover, there are
several strategies of China to make Renminbi as an international currency. In
order to protect local industry from a sudden appreciation, the Chinese
government is already allowing foreign investors to have controlled access to
the Chinese currency, for example, through the issue of bonds denominated in RMB.
The Chinese government’s stated objective of positioning Shanghai as an
international financial centre by 2020 is also a sign that it has a strong
interest in opening the market. China would further expand cross-border trade
transactions in Yen throughout the country. Coupled with the country’s economic
growth, this is likely to lead to steady long-term appreciation and to the
liberalization of the Chinese currency.
In addition, China
implemented liberalization of the Chinese currency. For example, Japan and
China are seeking to establish direct trade between their respective
currencies, bypassing the US Dollar. By buying RMB-denominated bonds (so-called
“dim-sum” bonds), Brazil is also seeking to give Brazilian companies access to
the Chinese capital market.
However, there are four major factors
that determine the suitability of a currency for international currency status
(Chinn and Frankel 2008). Is Renminbi/Yuan become the new global currency?[3]
1.
Size of Output and Trade.
The relative size of a country's output and trade
gives it a distinct advantage in having its currency used internationally. China shares in world GDP has also
increased rapidly over the past decades, from 3.0% in 1973 to 7.1% in 2008.
2.
Financial Markets.
A
country's financial market must be open, unrestricted, deep, and developed for
its currency to attain international currency status. We use the foreign
exchange turnover data from Chinn and Frankel (2008) to measure the size, depth, and
development of financial centers. In addition, we use the index of
capital account liberalization generated by Chinn and Ito (2008) to measure the
degree of a country's openness to global financial markets. The index ranges
from -1.81 to 2.54. While, China has maintained a higher index since the early 1990s (-1.13)
from only -1.81 in the late 1980s, it is still very low relative to the indexes
of the US and the eurozone, (2.54 and 1.73, respectively), implying greater use
of restrictive policies.
3.
Confidence in the Value of the Currency.
A
key requirement for an international currency is stability in its value. An
international currency is more attractive to hold if there is an assurance that
its value will not be depleted in the future. We use a country's inflation rate
as the confidence measure of its currency. In the last 10 years, the mean of
the China’s inflation
rate has been lower than that for advanced economies.
4.
Network
Externalities.
An international
currency that is more widely used by others has higher value. There is a bias
due to inertia in favor of currencies already used as international currencies.
This suggests that changes in the determinants of reserve currency status are
unlikely to lead to parallel changes in reserve currency share holdings in the
short run.
The volume of
cross-border trading denominated in RMB is evidence of the fact that it has
already become a regional trading currency. This volume stood at 506 billion at
the end of 2010. In the first three months of 2011, the volume of cross- border trade transactions denominated in RMB had
already exceeded the volume for the full year 2010, meaning that the trading
volume had quadrupled. In addition, an
offshore RMB interbank market was recently established in Hong Kong in order to
encourage the use of the RMB as a global trading currency.
Bibliography
China Focus. 2012. The Chinese Renminbi – The New Global
Currency.
Dobson, Wendy and Paul R. Masson. Will the Renminbi Become A World Currency.
Edited version published in China
Economic Review 20 (1, 2009): 124-135.
[1] Gito, Bung. 2011. Inilah Alasan Dollar Menjadi Mata Uang
Internasional. Source on August 14, 2012 from: http://bunggito.blogspot.com/2011/11/inilah-alasan-dollar-menjadi-mata-uang.html
[2] Chandra,
Bobby. 2012. Dominasi Dolar Bakal Runtuh,
Ini Alasannya. Source on August 17, 2012, from http://www.tempo.co/read/news/2012/03/27/087392850/Dominasi-Dolar-Bakal-Runtuh-Ini-Alasannya.
[3] Jong-Wha
Lee. 2010. Will the Renminbi Emerge as an
International Reserve Currency? Asian Development Bank.
Thanks brooo
BalasHapus