The yuan’s journey from reserve currency elite club to global currency


AMONG the elites, belonging to a prestigious club signifies its superiority in terms of social status. Interestingly, a similar club exists for foreign currencies.

Of the 180 currencies recognized by United Nations member states as legal tender, only a handful have reached the Special Drawing Rights (SDR) club of elite currencies. The SDR, introduced in 1969 by the International Monetary Fund (IMF), serves as an international reserve asset to provide liquidity to the global economy that central banks around the world could use as an overdraft account when needed.

Prior to October 2016, SDR Club membership was restricted to US Dollar (USD), Euro (EUR), British Pound (GBP) and Japanese Yen (JPY). Since October 2016, a new kid in town, the Chinese Yuan (CNY) has joined the IMF’s elite currency club. This new addition to the club since 1999 marked another step in China’s journey to become a more integrated part of the global economy.

Ever since he joined the club, everyone has been talking about how the CNY could compete with the incumbent – ​​the USD, and eventually become a key reserve currency for central banks around the world. This journey, while possible, has proven difficult – concerns persist around the governance and development models of the Chinese economy as well as the determination of the CNY/USD exchange rate by the People’s Bank of China (PBoC) .

In December 2021, the CNY constituted only 2.79% of the world’s foreign exchange reserves against 58.5% for the USD. In terms of global payments, only 2.14% of transactions used CNY in April 2022 compared to 41.81% in USD.

Nevertheless, all is not bleak for the prospect of acquiring global currency status for the CNY. A combination of factors such as the recent sanctions imposed by the United States on Russia following the war in Ukraine, the normalization of monetary policy observed in the largest economy in the world which led to an appreciation of the dollar, China’s increasing dominance in international trade and the Belt and Road Initiative (BRI) are all conducive to the internationalization of CNY. Additionally, an annual survey of reserve managers conducted by UBS Asset Management in July 2022 found that approximately 85% of central banks have invested or plan to invest in CNY.

Although difficult on a global level, countries in the Asia-Pacific region are quite receptive to the CNY. In June 2022, the PBoC had signed an agreement with the Bank for International Settlements (BIS) to establish a CNY reserve pool involving Bank Indonesia, Bank Negara Malaysia, the Hong Kong Monetary Authority, the Authority Monetary Authority of Singapore and the Central Bank of Chile. Each participating central bank would contribute a minimum of 15 billion yuan, or the equivalent of $2.2 billion, to the reserve pool.

In the event that one of these participating countries is faced with a problem of insufficient liquidity resulting from market volatility, these central banks could draw liquidity from this pool of funds to stabilize its financial system. In addition, participating central banks could also access additional funding through a secured liquidity window using their existing holdings as collateral.

Such a liquidity agreement entered into by Bank Negara Malaysia with the PBoC and other central banks would have a significant impact on investor confidence that the Malaysian financial system is well supported even in times of financial turmoil, as the country could tap into the pool of reserves. to obtain additional liquidity when the need arises. Meanwhile, having this arrangement also means that Malaysia will not need to seek financial assistance from the IMF in the event of a crisis.

When a troubled country turns to the IMF for emergency liquidity support, it will be subject to IMF conditionality, where the government would have to agree to certain adjustments in its economic policy to overcome the problem that led to the crisis. . Although the intention is good, meeting these conditions usually requires some form of austerity measures, which in turn dampen economic activity and ultimately growth as well.

In conclusion, for the CNY to be a global currency, there must be broad acceptance of the yuan as a reserve currency by central banks around the world, free trade of the yuan, loosening of the peg of the yuan to dollar and greater transparency in the monetary policy of the PBoC, among other factors. As Chinese authorities strive to resolve the above to fully internationalize the CNY, the yuan could be a regional currency of settlement in Asia given China’s increasing dominance in trade activities in the region as well as in economic benefits from the Belt and Road Initiative.

Dr. Liew Ping Xin is assistant professor at Universiti Tunku Abdul Rahman. The opinions expressed here are entirely those of the author.

The SEARCH Scholar Series is a social accountability program jointly organized by the Southeast Asian Humanities Research Center (SEARCH) and Center for Business and Policy Research, Tunku Abdul Rahman University College (TAR UC), and co-organized by the Association of Belt and Road Malaysia.


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