Can Yuan replace the US Dollar?

The Chinese currency Yuan may well be an alternative to the US dollar in the coming 15 years, if we take the opinion of the World Bank president Robert Zoellick seriously, and, of course, other indications in the international trade trends. And it will be what the Euro could not, over the years as well as the future trends indicate. The biggest advocate pushing forward the Yuan’s case is the Chinese government itself.

There has been a consistent demand from China before international financial forums and trade and trade regulatory bodies that the American dollar must be replaced by a better and more stable alternative currency in view of the volatility of the US dollar. Interestingly, China holds the largest US dollar funds outside the US and China is one of the biggest trading partners of USA. Maybe, for the same reason, China is a bit upset about the performance of the dollar.

“Though the Yuan cannot be used easily overseas now, it will become more internationalized over the next 10-15 years”, said Robert Zoellick. “This does not mean the Yuan will replace the dollar, but it can provide an alternative”, he said.

It may be noted that there has been a persistent demand from the US and other trading partners of China to adjust the Yuan value in terms of the US dollar, which is state-controlled and often manipulated to suit China’s interests.

Yet another important point to note is that since December 2008, China has entered into agreements worth $95 billion (650 billion Yuan) for currency swap with the central banks of South Korea, Malaysia, Belarus, Indonesia, Argentina and Hong Kong to avoid being hit unfavorably by the US dollar’s fluctuations.

According to Zoellick, Yuan is not ready to become the global reserve currency as yet. But he added that the US consumers are no longer the engines of global demand and they should ponder over the possibility of the dollar no longer remaining the international reserve currency.

The Euro and Pound Sterling have been more stable and consistently improved over the dollar in recent times. But they are limited in exchange rate applications worldwide and their relevance as global currencies is not widely accepted, though Euro has a wider appeal because of its prevalence in most of the European trade and commerce. As it comes to the Yuan, unless one is exposed to the Chinese trade and culture, it largely remains unknown in the case of people of many countries.

It is for the international trading community and the people of the world to decide upon a commonly acceptable global reserve currency, if the dollar is forced to the backseat in favor of the Yuan, and it should not be left to the decision of only the World Bank or its officials to decide. The serious objection to the Yuan still remains as its value can be manipulated by the government of China, which is not even a democracy. All of China’s media and policy making, including monetary and trade decisions are controlled by the Chinese communist party, not the market forces like demand and supply. So, Yuan the value of which is set arbitrarily cannot be acceptable as an international reserve currency.