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Is this the start of a the Chinese yuan as a reserve currency?

Capital flows into emerging markets are running at $575 billion a year, 20 percent higher than before the world financial crisis. The U.S. dollar has weakened over the past three months against all 16 major market currencies. Thailand Prime Minister Abhisit Vejjajiva, proposed the use of the Chinese yuan as a major regional trading currency. “The G20 did not make any progress on the matter and it is difficult to get the United States and China to express their clear stances on the issue. But what we can do is try to cooperate in the region and reduce the impact from currency volatility,” Mr Abhisit Vejjajiva said.

Mr Abhisit echoed a call made by the Asian Development Bank (ADB) to use China’s yuan as a major trading currency in the region to reduce the impact of currency volatility, especially linked to the weakening of the US dollar. He said he was the one who proposed the idea to the ADB. The prime minister expects the currency issue to be raised at the Apec meeting. “What Apec must push for are ways to promote regional cooperation so that the region can cushion the impacts of the fluctuations of currencies,” Mr Abhisit said.

He added, however, that for the Chinese yuan to have a greater role in transactions in the region, China would have to relax its tight controls on the currency and its capital account. At present, about 90% of trade in Asia is conducted in US dollars.

At the Asia-Pacific Economic Cooperation forum in Yokohama, Japan, China’s President Hu Jintao today pledged in a speech to business executives a “steady” reform of its exchange rate policy, a day after U.S. President Barack Obama criticized it for keeping the yuan “undervalued.” China also “aims to balance the trade gap by boosting domestic demand,” including by increasing regional development, he said.

Hu’s remarks come as a spat between China and the U.S. over which country is doing more damage to global trade intensifies. U.S. officials have complained about the weak yuan giving China an unfair trade advantage, while Chinese policy makers say the Federal Reserve’s monetary easing poses risks for financial stability.

“In the next five years, we would be more open,” Commerce Minister Chen said in Macau. “We will stabilize existing exports, actively boost imports, so our trade balance account would be kept at a basically balanced, reasonable level.”

In June, United Nations report released calls for abandoning the U.S. dollar as the main global reserve currency, saying it has been unable to safeguard value. “The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency,” the U.N. World Economic and Social Survey 2010 said.

The report says that developing countries have been hit by the U.S. dollar’s loss of value in recent years.

“Motivated in part by needs for self-insurance against volatility in commodity markets and capital flows, many developing countries accumulated vast amounts of such (U.S. dollar) reserves during the 2000s,” it said.

The report supports replacing the dollar with the International Monetary Fund’s special drawing rights (SDRs), an international reserve asset that is used as a unit of payment on IMF loans and is made up of a basket of currencies.

“A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency,” the U.N. report said.

How can you dictate what currencies a country should hold, or if they hold any at all?

start of a the Chinese yuan as a reserve currency?

About the AuthorProfessional

Amarendra is the Chief Executive Officer and Editorial Director at CEOWORLD Magazine, and is responsible for all business management, company operations, finance, and social advertising operations.

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