Motivation both the us and china hadhave motivation

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: let us see if the Yuan has the potential to grab the top currency role. Motivation Both the US and China had/have motivation to establish their own currencies as the global reserve currency. Shortage of raw material in the early twentieth century urged the US to look beyond the country shores, and get involved in the international trade to a greater extent. US started to promote dollar as the major reserve currency to benefit from increasing trade and flourishing economy. With the weakening of other major currencies after the WWI, there was an increased demand for the dollar worldwide that gave the US the edge of ‘dollar diplomacy’. China started to engage in foreign trade from 1978, particularly after joining the WTO in 2001. It has now become a major trade partner for many developed nations, both in terms of imports and exports. Further, China has made enormous effort to secure raw materials supply through FDI and increased participation in projects that are promoted by foreign governments. Once the Yuan is established as the main reserve currency, China expects to reap similar benefits as the US got in the second half of 1900s. Unfortunately for China, the decision to confer the title of ‘the global reserve currency’ is not unilateral. The Yuan can become the reserve currency only if the rest of the world, particularly the emerging countries: India and Russia, and developed nations: US and Japan, are willing to hold a bulk of their foreign reserves in Yuan. Given China’s cold relations with these major powers, the crowning of the Yuan as the main reserve currency does not seem feasible in the near term. Economic Preparation GNP: The US had overtaken the UK in industrial output and GNP terms by 1890. The time span between the emergence of the US as the leading economy and promotion of dollar as the reserve currency was at least 30 years (1890-1920). As of 2009, China accounted for 8.6% of the world GDP. Even if we assume that it is not necessary to become the leading economy first and then the reserve currency issuer (pound was fully dethroned in 1955), China has a long way to go. Continuous Trade Surplus and Huge Reserve Holdings: As with the US, China has experienced continuous trade surplus and accumulated enormous reserve holdings. China’s trade surplus emanates not only from economic efficiency, but also from undervalued currency. The continuous surplus had/has resulted in accumulation of huge reserve holdings for both countries. US’s accumulation was in gold reserves, which backed up the spread of dollar. Various countries including the US were willing hold dollars because they knew they could claim the Fed’s gold if required. China’s holding is primarily in dollars, which is currently the reserve currency. As the rest of the world will begin to acquire the Yuan to replace their dollar reserves, the value of dollar reserves will tank. Hence, the willingness of the other c...
View Full Document

Ask a homework question - tutors are online