Why The Chinese Yuan Won't Be The World's Reserve Currency

Tyler Durden's picture

Authored by Valentin Schmid via The Epoch Times,

Whenever someone gets too big and too important, the other players who can’t compete by themselves call for a challenger. This is true in sports, business, and even for currencies.

Because the dollar is so big and important, smaller countries were happy when the euro was launched to provide a counterbalance, if not to challenge the dollar’s position outright.

The euro ultimately provided that counterbalance, but never managed to dethrone the dollar as the world’s foremost reserve currency. The euro is used in 30 percent of all global payments, according to payment provider SWIFT; the dollar is still number one, at 40 percent.

But what about the Chinese currency, the yuan, the one that investment bank HSBC predicted would become the third-largest global trade currency by 2015—is it the ultimate challenger to the dollar’s top status? Not so much.

Only 16 percent of Chinese trade is settled in yuan, or renminbi (RMB), and the share of global payments ranks sixth at only 1.78 percent, behind the dollar, euro, pound, yen, and even the Canadian dollar.

To be fair, China’s leadership never called for the yuan to overtake the dollar. It was mainly Western cheerleaders like HSBC that looked at the country’s economic growth and applied it to the currency. 

Many pundits also thought the yuan would take a stronger role after Donald Trump’s election last November.

“No longer is the U.S. dollar the only haven of safety. There is an alternative—renminbi,” Daryl Guppy, CEO of the Guppytraders financial market training platform, told CNBC in November

Reserve Qualities

But what does a currency have to be or do to become the world’s reserve currency? Will the yuan ever qualify, and is the Chinese leadership pushing to replace the dollar?

According to a report by investment bank Natixis, there are four functions a successful currency needs to fulfill for both the private and the public sectors.

The first is being a medium of exchange. For private sector payments, we already saw that the RMB’s share is minuscule compared to the euro and dollar. Even the RMB’s use in trade with and investment into China is relatively small and no longer growing, according to the report.

 

Public sector payments between governments and central banks are conducted via central bank swap lines. They allow central banks of different countries to issue money that is not their own. For example, during the financial crisis of 2008, the Federal Reserve provided the world’s central bank with as much as $620 billion in liquidity. China’s swap lines amount to $430 billion, but are hardly ever used.

 

The second function is being a store of value, so that private players can invest their money in yuan assets like stocks and bonds and preserve their purchasing power. Also here, foreign ownership of Chinese equities is not very large, at around 0.8 percent, and for Chinese bonds, only slightly larger at 2 percent. Foreign bank deposits and loans into China have also been falling since 2014.

 

For the public sector store of value, that is, global central banks’ holding of foreign currency, the yuan’s share is 1 percent, despite the admission to the International Monetary Fund’s (IMF) special drawing rights (SDR) basket late in 2016. The dollar still takes the lion’s share at 64 percent.

 

The third function is the so-called unit of account. This means that trade invoices, for example, are issued in RMB and then paid in RMB rather than dollars. Also here, even for Australia, one of China’s biggest trading partners, only 0.5 percent of exports to China are invoiced in RMB.

 

For the official unit of account, another country would need to peg its currency to the RMB, but given China’s relatively closed capital account, this hasn’t happened yet. At least the RMB is now part of the SDR, which functions as a unit of account for the IMF, but it only has a 10.9 percent weight.

 

Lastly, the currency needs to have developed fixed income markets where payments can be parked in the form of bank deposits or bonds.

 

And while local Chinese corporate bond issuance is strong, foreigners aren’t buying into it, and the Chinese government bond market remains small in comparison to those in the United States and Europe.

 

Furthermore, bank deposits in RMB in the so-called global clearing centers are also falling. In Hong Kong, for example, only 5 percent of all bank deposits are in RMB and 37 percent in dollars.

Zhou Xiaochuan, governor of the People’s Bank of China, in Beijing on March12, 2015. Unlike Western pundits, the Chinese central bank never wanted the yuan to replace the dollar.  (Feng Li/Getty Images)

This, however, is not a disappointment for the Chinese regime, but rather for their Western cheerleaders. The Chinese have always favored an international solution to replace the U.S. dollar, namely in the form of the SDR, as China’s central bank governor Zhou Xiaochuan called for in a 2009 speech at the Council on Foreign Relations.

“The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations,” he said.

Disconnected from the dollar, yes - but not connected to the yuan.

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Justin Case's picture

The euro to replace the dollar? As likely as the Bolivar.

SDR is what China has been talking all this time. They never mentioned to replace the USD with Yuan.

chubbar's picture

There is no store of value function in any fiat currency, whether the FRN or the SDR. Anyone thinking that the SDR and the people who control the issuance of the SDR will be any different or less corrupt than those controlling the issuance of the FRN need to have their heads examined.

This is the start of the call for a one world currency and gov't, it will be corrupt to the bone if it occurs.

R2U2's picture

What should be and what will be are two different things.

 

Justin Case's picture

Hopefully debt serfs do understand what the SDR is, another fiat that can be created out of thin air. An SDR is essentially an artificial currency used by the IMF and is basket of national currencies. The IMF uses SDRs for internal accounting purposes. SDRs are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries' governments.

The IMF member states that hold SDRs can exchange them for freely usable currencies by either agreeing among themselves for voluntary swaps, or by the IMF instructing countries with stronger economies or larger foreign currency reserves to buy SDRs from the less-endowed members. IMF member countries can borrow SDRs from its reserves at favorable interest rates, mostly to adjust their balance of payments to favorable positions.

Besides acting as an auxiliary reserve asset, the SDR is the unit of account of the IMF. Its value, which is summed up in U.S. dollars, is calculated from a weighted basket of major currencies: Japanese yen, U.S. dollars, Sterling and the Euro.

Tofteryd's picture

Bitcoin will be the next SDR

post turtle saver's picture

- SDRs have to be converted to a currency before they can be used

- SDRs are not allowed to be privately held

- the amount of SDRs in circulation compared to the currencies of the world is extremely low

 

given the above, use of SDRs as the world's international currency and as a store of wealth cannot and will not happen

q.e.d.

peddling-fiction's picture

The Economist predicted back in 1988 that the Phoenix world currency would come flapping in 2018 and would be based on a basket of SDRs.

Aristofani's picture
Keiser Report: Will the dollar live to die another day? from 6 September 2016!

In this episode of the Keiser Report, Max and Stacy discuss the new m-SDR and ask will the dollar live to die another day? And are SDRs forever? As the G20 in China concludes they ask whether the new Special Drawing Right is the first step toward one world currency. In the second half, Max interviews Dan Collins of ChinaMoneyReport.com about yuan internationalization and China’s quantum satellite.
https://www.youtube.com/watch?v=HIY14IjHGRk
ThankUGartman's picture

You mean it will be....part of the basket of currencies including the RMB, Dollar, Pound Sterling, and Yen.

el buitre's picture

Didn't you learn anything from mortgage backed securities?  It's like this.  You take a bunch of dead beat subprime. glue factory mortgages.  Then you bunch them together and tie a bow around them.  Suddenly they transform like Superman coming out of the telephone booth into S&P, Finch, and Moody AAA.  It really is magic - financial magic.  It's based on mathematics.  Same thing with these glue factory five fiat currencies.  Rothschilds are betting on it.  Just ask smooth talking CIA buddy Jim Rickards.  Now there is a man you can trust.

Tarzan's picture

There will be no basket of fiat, they'll all crash together, the way it's planned! One for all, all for one, if we go, we take the world with us, no longer massada, but sampsonada....

Out of the ashes of the psychopaths dream collapse, and resulting world purge, their goal is a single means of trade, digits in the sky, one all powerful government, and a mark that identifies each of us, a number for our name, and all trade outside that system outlawed world wide. 

While I know they will fail in the end, this is the track we're on. The worst times the world has ever seen.  You may say that's religious babble, but everything before us points to this day, when fiat dies in one great flash crash, in an hour, vast "wealth" vanishes and the world is thrown into chaos. 

Close your eyes if you wish, but there's no stopping this train, she's going to hit a wall, this mega bubble is going to burst.

When that day comes, the world will see the greatest blood bath EVER! 

Then godless idiots will shake their fists at God, for the shit storm we brought on ourselves.

Justin Case's picture

The SDR will be the USD life saver, buying US debt dollars to live another day.

noless's picture

Do the Indians have the same superstitions?

AC_Doctor's picture

He right, no Yuan reserve currency, until the Chinkerz back that bitch up with the 20,000+ mountain of gold they have stashed away...

el buitre's picture

It's a chemical fact that gold will sublime into the atmosphere if it is stored improperly.  That is what happened to the people's gold at Fort Knox.  They should have consulted a chemist :-(

Miss Informed's picture

At 4892 degrees Fahrenheit gold goes up in smoke. Hope the air conditioner in Fort Knox is working.

sinbad2's picture

 

No not even then, being the reserve currency means your currency is always the most valuable, so your products always cost more than the products of other countries. It's great for banks, but it destroys industry, the factories close and nobody can get a job outside of finance.

China has watched Americas decline, and they aren't about to make the same mistake.

francis scott falseflag's picture

 

Ding Ding Ding

We have a winner.

 

If the Chinese wanted a stronger currency, they would insist that all their

products be sold against yuan denominated Letters of Credit.  It's obvious

they don't want Central Banks around the world buying up yuan on forex, 

making the yuan stronger, and the Chinese products more expensive.

 

Who knows what might have been if Chinese factories had asked for

yuan backed Letters of Credit 25 years ago to pay for their exports?

Aristofani's picture

Keynes said that too, in 1945!

illuminatus's picture

One world government and one world currency go together nicely. All hail to our masters forever more.

Justin Case's picture

And all the lemmings cheering on the vapour currencies, to support total Gov't control over the debt serfs. Playing right into their hand.

marathonman's picture
Please allow me to introduce myself
I'm a man of wealth and taste
I've been around for a long, long year
Stole many a man's soul to waste And I was 'round when Jesus Christ
Had his moment of doubt and pain
Made damn sure that Pilate
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But what's puzzling you
Is the nature of my game I stuck around St. Petersburg
When I saw it was a time for a change
Killed the czar and his ministers
Anastasia screamed in vain I rode a tank
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(Woo woo, woo woo) I watched with glee
While your kings and queens
Fought for ten decades
For the gods they made
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When after all
It was you and me
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I'm a man of wealth and taste
And I laid traps for troubadours
Who get killed before they reached Bombay
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Is the nature of my game, oh yeah, get down, baby
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Stormtrooper's picture

There are actually five key functions for any fiat currency to be a reserve currency.  The fifth is that the paper that it is printed on must have a very high BTU content so that when it has been printed into hyperinflation, it can be used as a source of fuel for cooking meals and heating buildings.  Toilet paper, in general, is too thin and burns too fast but the the worlds major fiat currencies, when tightly bundled can make a pretty good fire.  This function needs to be considered by the counterfeiters at the central banks.

BitchesBetterRecognize's picture

Chinese themselves know well the Yuan is worth shit. They value wealth through "commerce/trade" not through a fucking currency bullshit. 

Pasadena Phil's picture

Isn't "yuan" the Chinese word for "clam"?  Renminbi is the same in Chinese and English. No one knows what it means. I think it came into existence the same way as Boaty McBoatface. Chinese have a cynical sense of humor too.

East Indian's picture

Yuan is a generic term for a unit of Chinese money, like 'Mark' was for the German money.

Renminbi - is the proper name for the present Chinese currency - like 'Deutsch Mark' was for the currency issued during a particular period.

Déjà view's picture

Renminbi...a spare tire...convertible currencies steel belts are showing...

RabbitChow's picture

Yuan - in Chinese it is pronounced almost the same as the Japanese "yen".  Same word in both llanguages, it means money.

 

Renminbi - a communist contrivance, it means 'the peoples money'.  

Suleyman's picture

Renminbi means "the peoples money".

FedFunnyMoney's picture

For a store of value, I'll trust good old gold and silver. Fuck fiat.

Justin Case's picture

The only real money. The rest are proxies for gold and silver.

TRM's picture

Article is backwards. SDR for the US dollar is 40+% and it is 66% of international trade.

MaxThrust's picture

There should be an new digital currency that creates itself as the need arises. How that could be implemented is beyond the capability of my grey-matter. The creation of currency to enable independent [from financial institutions] transaction is the only way we can escape the clutches of the Banking Cartel. The algorithm that creates this currency has to be a one and only unchangeable item stored across thousands of computers. One day this may become reality but I am sure it will be well passed my expiry date.

Aristofani's picture

“The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations,”

Keynes also said that at Brettonwoods in 1945!

onmail1's picture

http://www.zerohedge.com/news/2017-04-10/doctor-dragged-united-plane-aft...
https://en.wikipedia.org/wiki/United_Express_Flight_3411_incident

Gandhi was thrown out of train by whites in South Africa
And he swore to end this tyranny of former cannibals
The whites in Europe before Christianity came were
human flesh eating cannibals practicing witchcraft
They ate an entire race of Neanderthal humans 25000 years ago
imagine
Then these whites draculas from Europe started
piracy, colonialism, slavery, looting , murders & landgrabs
They colonized entire continents & dispossessed the natives
Australia, New Zealand , Canada, USA, Hawaii, Puerto Rico all occupied by force
by either guns or by money, buying lands at extreme low rates(at gunpoint)
After colonization they treated ppl as slaves to work on their plantations
instead of food crop they grew cash crops - Indigo, sugarcane, tea, opium
that caused famines which killed more than 10 million people
The hunger of white draculas is insatiable
Their greed caused world war 1 & world war 2
And then they formed NATO , UN , Dollar & Euro to rule the world
Now the white man need not board the ships & sail to lands far away
All they need to do is print Dollar & Euro
and buy all good goodies from rest of the world
=============

USING WESTERN CURRENCY MEANS SLAVERY TO WEST

noless's picture

Wouldn't it have been amazing to have lived on Earth with multiple sentient sapien species? All lost.

TrustbutVerify's picture

National bankruptcy rocks! Whether its Chinese, the EU or the United States!

LOL...Trump tries to cut some spending...just a small amount and the howls begin. "Keep the printing presses running!"

JailBanksters's picture

Simple

The Jews (aka Zionist, New World Order, Deep State) can't control China as easy as

the UK, USA or Germany. They tried in Russia but Putin kicked them out.

But if everybody had a Gold Backed Dollar, you don't need a Reserve Currency. The question then becomes, do you really need a reserve bank ?

There are those that say there isn't enough gold on the planet, bull, it just means gold has to go to 10,000 20,000 100,000 dollars an ounce.

And every time US plucks another Trillion out of Janets Ass, then Bingo the price of Gold per Ounce goes Up.

 

 

ds's picture

Forgetting that the US$ is backed by 'property rights' as defined under US Regulations. These rights are in turn defended by the might of US military power. That's where the amoral trust lies. 

China's now Ponzi  economy is reliant on more debt induced growth to feed its export model spawning more zombie SOEs. The zombies are sustained to provide employment with all the consequences of "cans kick down the road' etc. With these basics, they know they cannot build a financial economy with all its soft infrastructures to unthrone the $. Therefore they proselytize the use of SDRs. 

The US economy is also not the Victor viz the US$. Its flows have to be managed for what is good for the US economy that again has no internal consensus. The asinities lie in not getting amply rewarded for being the protector of the global reserve currency.

 

Jack Oliver's picture

China will introduce a gold backed 'trade' currency - They haven't been building the 'Silk' road NOR are they hoarding GOLD for nothing.

China NEEDS to be paid in something tangible and of FUCKING substance !!

The US dollar is neither !!

No GOLD - No SALE !!

Ink Pusher's picture

Bitcoin will be the catalyst that finally literally kills the petro dollar system. Gold backed currency is on the return, there's no stopping it.

Once BitCoin's actual overvalued cap is realized, Precious Metals will once again rise to center stage. It's only a matter of time.

Bit-Currency literally fucked itself because the actual mining numbers exceeded output projections...Anyone can create crypto currency, it's as easy as picking our nose for a big shiny green booger. There will always be a sucker out there willing to buy,sell and trade it.

It's a fucking pipe dream for morons who believe that a line of bullshit code is worth more than an ounce of bullion. It won't last.

 

AE911Truth's picture

The New World's Reserve Currency is Bitcoin.

Not Ethereum. Ethereum is Skynet. We don't want that.

Money for the people is silver, gold and for penetrating hostile borders, Zcash.

fangulos's picture

Chinese have a better standing this time, 'Mo Money' should literally hook up with hourly labor productivity in EACH state, with more refugees and spics pouring into West, our efficiency is in decline which makes USD more of a tossed tissue by days when purchasing REAL assets. Meanwhile China might have this issue or that, their demographic potion is relatively stable, their working forces runs more coherently than Merikwa, period. If we don't put a stop to white genocide first, gold or fiat, we are toasted.