Monday, May 25, 2015

Too Early For Yuan to Replace U.S. Dollar

There has been a lot of speculation concerning the goal and strategy of China concerning the place of the yuan or renminbi on the world economic stage.

I have no doubt the Chinese have a goal of becoming the leading reserve currency in the world, but if that ends up being a reality, it's going to be many years from now.

The idea that China is attempting to bypass the existing currency market and working to build an alternative to it is actually the exact opposite of what it really wants to do, which is to become a larger player in the current global economy.

For now, the yuan isn't close to being ready to be a currency leader, as China needs to take a number of steps before it's going to be considered a means of paying for major transactions on a global basis.

China's first step will be to push to be accepted as a reserve currency at the International Monetary Fund. In October the IMF will convene to review, among other things, whether or not to include the yuan in Special Drawing Rights group of reserve currencies. This review only occurs twice over a 10-year period, so it's important for China to get this done; which I think it is likely to accomplish.

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