China’s Quest to Make the Renminbi the Next Reserve Currency
I’ve penned articles recently on China’s quest to have the next reserve currency of the world be the renminbi, otherwise known as the yuan and China’s official currency.
In unprecedented steps to circumvent the use of the U.S. dollar for the first time since the inception of the U.S. dollar as the reserve currency, China, Russia, Australia, the United Arab Emirates, and India are now transacting business with China denominated in yuan and not U.S. dollars.
The BRICS countries—Brazil, Russia, India, China, and South Africa—have decided they will trade with each other in their respective currencies, circumventing the use of the reserve currency entirely.
Since China has created transactions in yuan with Brazil, Russia, and India, South Africa was the “odd man” out—but not anymore. It is no secret that South Africa has the farmland and natural resources that China needs for its large population. What South Africa is missing is the capital to farm the land and get those resources to market. China has the capital, so South Africa will most certainly listen to China’s terms.
China and South Africa have agreed to use the yuan in their transactions, and more central banks in Africa are including the yuan as part of their foreign reserves.
China was also busy in the month of June signing a trade agreement, with Chile with the aim of doubling their trade in three years. Similar to Africa, China will provide the capital to expand Chile’s agricultural capabilities and enhance more mining exploration. Part of the agreement is to settle all transactions in yuan.
Of course, the yuan cannot be a reserve currency as long as it is not floated freely. The reserve currency needs to be free of any pegs and needs to be available worldwide.
China has increased the trading range of the yuan to the U.S. dollar, and has also tripled the amount of money international fund managers can invest in China. These are small measured steps on the road to the eventual complete unpegging of the yuan.
China also announced in June that it was creating a special business zone to test the yuan’s convertibility. Basically this controlled area would test the various scenarios of what would happen to the yuan’s value in particular circumstances in world trading if it was allowed to float freely.
The above are just some of the steps China is taking to make the yuan a more international currency and eventually a reserve currency. China is still a long way from its goal, but the steps above are a logical and methodical progression of steps for the country toward achieving its intended goal.