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Chinese Currency Internationalization: Is the Yuan There Already?

China is a recognized currency manipulator, and is stopping at nothing to ensure that’s the Yuan is fully internationalized. The nation has adopted unpopular techniques to reach that goal, including limiting the availability of the Yuan. This unprecedented approach toward internationalizing a currency has not escaped the attention of scholars such as Chris Brummer, but the big question for now is, will China succeed in the path it’s taking? To put this issue into proper perspective, you need to consider the Yuan relative to the real interpretation of “international currency,” and the prerequisite characteristics that global currencies like the US dollar and British pound demonstrated a long time ago.

For starters, it’s necessary for a currency to be able to effectively function as a medium of exchange, and that’s assessed based on its approval levels among buyers and sellers as a form of payment for products bought, and for other financial matters. A currency demonstrates this capability if it’s legal tender, and as a question of market practice, approved as carrying an exchange value for a wide spectrum of economic activities. So, how well the Yuan is fulfilling this role as a medium of exchange beyond the Chinese borders is one way to measure its status as an international or potential international currency.

Another measure of currency internationalization is the extent to which it functions as a unit of account to value or cost things like services, goods etc. Notably, a currency may serve very well its role as measure of value without necessarily being used a lot as a medium of exchange. This means that one currency may be used to measure the value of goods, only for other currencies to be used to make the payments. Be that as it may, any currency that’s popular as a measure of value internationally is likely a preferred point of reference for cross-border transactions, no matter if any specific market players are really holding the currency.

The third and equally vital indicator of a currency’s international status is how well it’s doing as a stable store of value. Again, this is not a question of how widely accepted a currency is as a means of trade, but whether it can operate as a reserve asset for longest possible. In a scenario where a currency is utilized only as a medium of commerce, but market players don’t trust it as a reserve asset, it’ll certainly not be very popular considering that traders and people may give it up easily, fearing that it may lose value and negatively impact their capacity to utilize it.

Whether or not the Chinese Yuan will have to follow due growth processes and attain the important fundamentals of international currency remains to be seen.

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