The 9 Most Unanswered Questions about Securities

Does the Chinese Renminbi Possess International Currency Characteristics Yet?

China is a recognized currency manipulator, and is stopping at nothing to ensure that’s the Yuan is fully internationalized. The country is achieving its objectives through unconventional means, including restricting the availability of the Renminbi. This unprecedented approach toward internationalizing a currency has not escaped the attention of scholars such as Chris Brummer, but the big question for now is, will China succeed in the path it’s taking? To answer that question, one has to revisit the definition of an international currency and see whether the Yuan measures up to that status, which other currencies like the US dollar and the British pound have enjoyed for decades.

First things first, a currency must play its part as a means of exchange as demonstrated by the extent to which traders and buyers use it as an acceptable form of payment for items sold, as well as for other financial affairs. For any currency to function as such, it must be legal tender and, as a matter of market tradition, be accepted to hold exchange value for a broad bracket of economic transactions. Evidently, how great a means of exchange the Renminbi is proving to be is a reasonable perspective from which to evaluate the viability of its internationalization ambitions or likely achievements.

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. Note that, while a currency may be effective functioning as a measure of value, it need not be widely used as a means of exchange. This means that one currency may be used to measure the value of goods, only for other currencies to be used to make the payments. With that said, any currency boasting worldwide recognition as a measure of value is usually an important basis for informing international financial dealings, regardless of whether certain market players are actually using the specific currency.

The final and also vital measure of a currency’s international participation is its reliability as a steady 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. In a scenario where a currency is utilized only as a medium of commerce, but market players don’t trust it as a reserve asset, it’ll certainly not be very popular considering that traders and people may give it up easily, fearing that it may lose value and negatively impact their capacity to utilize it.

Researchers are still assessing if China may be forced to embrace standard policy for the Yuan to achieve the vital attributes of an international currency.

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