What the Chinese Yuan Must Accomplish for International Currency Status

It’s known that China manipulates its currency, and is pulling out all the stops to see its Yuan gain full internationalization. The country is achieving its objectives through unconventional means, including restricting the availability of the Renminbi. While most scholars, including Chris Brummer, have taken note of the anomalous currency internationalization process, the main concern right now, how exactly with this end for China? 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. Such a currency must be legal tender in the first place, and it must be shown to posses trade value for many categories of economic exchanges, as a matter of business practice. Thus, the extent to which the Yuan is effectively functioning as a medium of exchange globally is an important way to assess its success as an international or prospective 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. As such, it’s possible to have the cost of goods being assessed in one currency, and another currency being used to pay for them. 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. Clearly, when a currency is deployed only as a tool of exchange, but people can’t depend on it as a store of value, it’ll lack demand mainly because companies and consumers cannot keep it for extended periods fearing that their ability to use it may be hurt in case loss of value occurs.

Today, it’s still not clear whether China will have to adopt a conventional growth trajectory to give the Yuan the core characteristics of international currencies.

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