Fierce competition is set to color the world of international finance as the Chinese yuan aims to challenge the dominion of the U.S. dollar and euro.
According to Chen Yulu, a prominent Chinese economist and former vice governor of the People’s Bank of China, this aspiration might become a reality by 2035 given the fulfillment of certain conditions.
The not-so-impossible path to parity
The quest for parity between the yuan, the U.S. dollar, and the euro lies at the intersection of global currency dynamics.
Currently ranking as the third largest international currency, the yuan’s share in the global marketplace has been steadily expanding, backed by the growing influence of the Chinese economy.
However, gaining ground on par with the dollar and the euro is an uphill task that requires careful and strategic planning. According to Yulu, the fulfillment of three conditions is vital.
The first calls for a modern industrial system buttressed by the real economy. This means an industry capable of producing goods and services that meet international quality standards.
Next, the establishment of domestic financial markets is crucial. These markets need to be deep enough to absorb the currency fluctuations that come with increased internationalization.
Last but not least, is the requirement for substantial progress in the institutional opening of China’s financial system and a robust risk control regime.
This would provide the necessary assurance to international investors and traders that their investments are safe and that the market is operating on a level playing field.
Renmin’s propositions and the digital play
The findings from the recently launched report by Renmin University provided more insight into how the international stature of the yuan could be enhanced. Notably, the institution proposes that China invest more in establishing free-trade agreements, be it at a bilateral or regional level.
By fostering a favorable environment for trade and investment, these agreements would inadvertently boost the global usage of the yuan.
Additionally, China’s leading position in digital transformation and the development of a central bank digital currency should be fully exploited, according to the report.
Despite the path laid out for the yuan’s rise to supremacy, the journey is not without its skeptics. Renowned figures such as Nobel laureate Paul Krugman have expressed doubts regarding the yuan’s ability to topple the U.S. dollar as the world’s reserve currency.
On the other hand, Aleksei Mozhin, the International Monetary Fund’s executive director for Russia, pointed out in June that more countries are opting to trade in the yuan. This is not just limited to trade with China, but extends to transactions with other countries as well.
All eyes are now on China as it maps out its strategy to steer the yuan towards its intended goal. While the path is fraught with uncertainty, the yuan’s journey will undoubtedly send ripples throughout the world of international finance.
The unfolding of this currency saga not only holds economic implications, but also stands to redefine geopolitical dynamics in the years to come.
