Chinese Yuan Becomes Part of International Currency

Chinese Yuan Becomes Part of International Currency

Chinese Yuan – Although it is not yet known when, but it is likely that China will become a very significant symbolic milestone. This happens when the International monetary fund or IMF decides to include Chinese Yuan in the reserve currency, following the US dollar, British pound, Euro and Japanese Yen.

Chinese Yuan

Chinese Yuan Becomes Part of International Currency

Even though it has advantages in financial terms, SDR participation cannot give the yuan the opportunity to approach international prestige and coexist with the US dollar as one of the reserve currencies at this time.

Chinese Yuan Development

In the country of Indonesia, China’s currency is called the yuan, even though the currency has the real name Renminbi. Yuan is a term for the unit, so that in this case the renminbi will be different from the Indonesian rupiah which in addition to being the official name for the currency is also for the unit.

Renminbi is an official payment instrument for mainland China. However, for Macau and Hong Kong they have their own official currency. Hong Kong will use Hong Kong dollars and Macau will use Pataca. Most trade in Hong Kong will usually refuse to make payments with yuan.

Its development in the beginning of history, the Chinese currency was maintained to have a fixed exchange rate of 2.46 Yuan per US dollar. Then it was revalued to 1.50 Yuan. But when China’s domestic market began to open freely in the 1980s, the government began to devalue the exchange rate, the aim was to make the prices of exported goods more competitive to the peak of the weakest level at 8.62 Yuan per US dollar in 1994.

In July 2005 the benchmark for the dollar was released for a while, but then paired again. At present the Central Bank of China has implemented a managed floating system by providing price fixing based on a certain range where the exchange rate can move.

If you have visited an international financial news site, for example, like Reuters, you certainly already know that Renminbi or Yuan has 3 ISO codes, namely CNH and CNY, and each has a different exchange rate. Both are released by the Central Bank of China, but their use is different.

CNY will refer to currencies that can be transferred within the boundaries of Chinese territory. Meanwhile, CNH or commonly called offshore Yuan can be exchanged outside China. Another difference between the two is that CNY will usually be at a certain range by the Central Bank, while CNH does not. This is what causes the movement in the value to be different.

Foreign Currency Reserves and US Dollar Supremacy

Simply put, the reserve currency is a foreign currency that will be owned by the central bank of each country or other large financial institution that will give profit to holders of foreign currencies. Reserves in the currency can then be used as things that can meet international debt.

Whereas in a central bank a country can use the reserve currency to make a stable currency value. In addition, when commodities are valued, the reserve currency holder can pay for the commodity without having to exchange the currency first.

This can happen because in some commodities and also international notes that are valued in US dollars as a reserve currency. For example, oil prices set by OPEC and 50% of the value of international debt securities are US dollars.

Dollar Becomes World Currency

At present, of course there is no doubt, in fact the dollar can always maintain supremacy because its dominance is very well established. In addition, there are several countries that also continue to provide support to the US dollar by maintaining high-valued dollar reserves as the most acceptable form of payment.

The payment is 86% of transactions in foreign currencies for each year. However, even so the dollar will not always hold this position. So it is very necessary to rethink how to reach this point.

After the Second World War, the United States saw that it was evident that the rapid growth that took place at that time was due to various factors. For example, such as technological innovation and also a very strong manufacturing base. In addition, large economic conditions accompanied by abundant human resources make the United States a supplier of most of the needs of several countries in the world. That’s why the US dollar is considered very important for trading activities.

Having a fairly deep and liquid capital market condition further helps the US become one of the most dominant markets for financial assets. High liquidity and the low nature of the risk also make the US more attractive.

The thing that affected the US dollar’s rise as part of one of the reserve currencies was due to financial market deepening in America. There are times when US bonds only have a value of 220% of GDP. Its network effects can make a significant demand in currencies, where assets for finance from the market are more denominated.

Then, what about the Chinese currency or the Chinese Yuan, get the currency to reach the same point as the US dollar?

The IMF Officially Makes the Yuan a Global Reserve Currency

The group for reserve currency or also called SDR consists of 11% of the Chinese currency and almost 42% of the dollar. In 2016, the IMF inaugurated that the Chinese currency has joined US dollars, Euros, Yen and Pound Sterling as part of the global currency reserves. The IMF will include Yuan as a reserve currency to help overcome economic problems. Economic analysts said that China had tried to enter into the SDR group, because its large role could be developing funds for the global economy.

Some things that are of concern when Yuan is part of the international currency:

  1. China has become more transparent with economic statistics, such as the amount of gold reserves and foreign currency held.
  2. Fluctuations in the Yuan exchange rate that has been released freely on the market. So that the movement will be greatly adjusted to demand and also offers in the market.
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