Copyright John T. Reed 2015
China wants its currency the yuan to be one of the world’s reserve currency. They have been successful lately at getting bilateral agreements to get trading partners to pay for imports with yuan and accept yuan as payments for exports. Last year, they got the percentage of their international transactions done with yuan up to 25% of the total.
Who cares? For one thing, having to pay in US dollars (USD) and being forced to accept USD on international transactions forces them to pay a conversion fee to turn yuan into USD or USD into yuan. Also, it’s a prestige thing. And if your country is ever short of the foreign currency needed to pay foreign bills, being able to pay in the currency you print makes life easier. It also means you are being trusted more than when you had to pay USD for everything.
They used to rank 20th in SWIFT transactions—international money wires. Now they are seventh.
So are they going to displace the USD as THE world reserve currency? No.
Money serves three purposes:
1. Store of value (a way to hold long-term savings)
2. medium of exchange (way to avoid having to barter for everything)
3. unit of account (standard way to keep track of how much you own and how much you are owed)
So these agreements and SWIFT wires are exchanges where the medium of exchange is the yuan. Big deal. They are being trusted MOMENTARILY.
I have no respect for the bitcoin, but I have acknowledged that it might make sense for momentary transactions on the grounds that it is faster and cheaper than SWIFT wires which cost about $45 in my experience. So I think these bilateral “let’s accept each other’s currency” agreements do little more than raise the yuan “up” to the level of bitcoin.
But who is dumb enough to trust China with regard to purposes 1 and 3? China released the amount of 2014 international payments in the yuan, but we can’t compare to 2013 because they did not release the figures then, probably because they were embarrassed at how low they were. This is banana republic lack of transparency, like the U.S. refusing to release unemployment figures for a particular month or year.
China also has capital controls. That means you need government permission to take yuan out of the country—and if you get it it will only be for small amounts. And you cannot possess foreign currency within China. If you look at the list of countries with capital controls you will find a list of generally the worst, most corrupt, screwed-up countries in the world.
No intelligent person would trust China’s government with their life savings or even allow them to be denominated in a currency controlled by Communist China.
The ultimate question may be where does the government of China put their reserves. Answer, in USD. They are the largest owners of US bonds. They own 7.2% of all publicly held U.S. bonds—about $1.3 trillion. as far as I know, no country on earth holds yuan as part of their reserves. IMF does not recognize the yuan as a reserve currency.
John T. Reed