The Yuan, also known as the renminbi or RMB, is being actively promoted by China to become an international currency. According to John Peace, chairman of Standard Chartered, a British bank, “What I do see the renminbi becoming as important as the dollar. But I don’t think this necessarily is measured in centuries, I think this can happen quite quickly.”
Because of the US Dollar’s historically assigned status as the global currency standard, it is accepted throughout the world for debt payment and/or currency exchange. Other currencies in the world, including the German Deutsch, Mexican Peso, and others, can only be used to pay for debt in their own native countries, respectively. So, for example, any debt Mexico would own to another country like China, it would have to convert its Peso to Yuan or renminbi, and then make payment to China in that currency.
This economic ‘fact of life’ could prove disastrous to the United States if, or more appropriately, when, the US Dollar is replaced as the global currency standard. As a result of the dollar’s continued deflated value, the United States would be forced to exchange dollars into other currency to pay its debt with other countries. Unknown to many people, China is the largest creditor to the United States.
There is work and change that needs to be accomplished, however, before the Yuan, or any other currency, could legitimately be declared the global currency standard. The Yuan, for example, would need to be able to be converted to other currencies before it would be accepted and/or exchanged with other countries.
Currently, the US dollar and the Euro are the two best examples of currencies that are fully convertible and can be exchanged into other currencies (or gold) at any time, across the world, without government restrictions. There are costs and associated risks that accompany the ability of a currency to be converted. China would need to agree to and absorb those costs and risks before other countries would begin to consider or desire to exchange currencies for the Yuan.
China’s rise in the world to have become the world’s largest exporter and second largest economy should not be a surprise. It has steadily demonstrated growth over many years and is subsequently now realizing its economic strength and has begun to flex its financial muscle across the world. China continues to steadily work with other countries to promote the acceptance and exchange of its currency, the Yuan, in the course of conducting business.
The United States has just cause to be concerned about this issue. According to a recent study by HSBC Bank, 55% of China’s trade occurs with developing countries and emerging markets. Their findings indicate that more than half of that trade could be realistically conducted using the Yuan by 2015. The demand for Yuan continues to increase in those developing countries. The realization of that prediction would translate into 2 trillion dollars of Yuan each year.
Last week the central bank allowed Chinese businesses to execute its investments abroad using the Yuan for the first time. This is surely an indication of the Yuan’s and China’s continued growth, strength and influence across the world.
Another example of this trend has already occurred in New York and Los Angeles. Marking another first, the Bank of China now offers Yuan-denominated accounts at its branch offices there. This represents the first time that a non-US owned bank has established this type of service within the United States. This offers a glimpse of things to come.
The HSBC study also offered the following conclusions, “The internationalisation of the renminbi will have significant implications on China and the global economy over the long term.” China recorded its 2010 economic growth at 10.3% and HSBC estimates its 2011 growth will be 8.1%.
Most importantly the report stated, “We may be on the verge of a financial revolution of truly epic proportion.”