China’s yuan has recently seen its value drop, a move engineered by the Chinese government to ward off speculators ahead of liberalization. The Chinese government is set to allow the yuan to trade within a wider ban, which should lead to increased adoption and use across the globe, at least in the long run.
Over the past week, the yuan has steadily declined vs. the dollar. The Wall Street Journal reports that this is a move being carried out intentionally by the Chinese Central Bank in an effort to scare away speculators who have been pushing the yuan higher. In the short term, the declining currency will also push exports higher.
Liberalized yuan more likely to become global currency
Investors and central banks outside of China will want to see the yuan become liberalized before stockpiling cash in it. By allowing the yuan’s value to be set by the free market, the yuan will not be subject to the whims of the government, and over the long run should become more stable.
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Once liberalized, more central banks will begin stockpiling the yuan, which will help spread its use and adoption across the globe. Banks and other major financial institutions will likely follow suit and begin stockpiling the yuan. Before China can liberalize its currency, however, it must free it from the grip of speculators.
International investors looking for alternative to dollar
The U.S. dollar and American economy as a whole has taken a beating in the last few years. With America’s fiscal situation looking increasingly dire, and fundamental problems emerging in the United States’ economy, many are looking for a practical and viable alternative to the dollar.
Before the European Union’s fiscal problems and financial crises, many believed the E.U. could offer an alternative, but the continents’ decline has put serious doubt in the viability of the euro. No other country now offers the financial or economic clout to challenge the United States and the dollar, except China.
Positioning the yuan as a truly global currency would be a major boost for the Chinese economy. Most importantly, it would make it easier for Chinese companies to conduct trade as deals would no longer have to be denominated in dollars. Indeed, China has already made direct currency swap agreements with the European Union, Brazil, and others.
With China’s economy gaining momentum, and the Chinese national government one of the fiscally healthiest in the world, the country is looking like an increasing attractive alternative to the United States. The American government’s increasing infighting and lack of economic direction are only adding the Chinese in their efforts.