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In a widely anticipated event, the International Monetary Fund (IMF) is expected to soon bless China’s currency, the yuan, with official reserve currency status.
This month, the IMF is likely to include the yuan in the select group of global currencies included in its Special Drawing Right (SDR) basket, joining the dollar, euro, yen and the pound.
And for months now there have been wild stories floating around the financial world that the IMF’s move will result in massive — and potentially destabilizing — shifts in foreign-exchange markets.
One of the more sensational versions of this story strongly implies the dollar’s reserve currency status will be threatened, perhaps triggering a collapse in the value of the buck, and a global currency crisis.
Nothing could be further from the truth.
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| Will the yuan threaten the mighty dollar? |
The IMF’s pending move should actually help over time stabilize the global financial system, which is far too dollar-dependent today. But this doesn’t mean the yuan will suddenly rival the dollar for global reserve currency dominance.
Is the yuan even ready for prime time?
That the yuan is even being considered as a reserve currency by the IMF is still a surprise to many investors. In spite of recent reforms, China’s financial system remains tightly controlled, and the yuan is still not freely convertible.
Although the global acceptance of the yuan has increased dramatically in recent years, it’s nowhere near as widely used as most other major currencies.
In 2012, the yuan was the world’s 20th-most used currency for cross-border payments, but has surged to fifth place now.
Yet, the yuan only accounts for about 2.5% of total global payments by value today.
Still, there’s no denying that China’s rapid economic rise suggests the yuan is quickly gaining reserve currency status. After all, China is the world’s second-largest economy and has been the world’s leading exporter since 2009.
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China has taken important steps toward financial reform, including opening its mainland financial markets more to international investment and expanding its fixed-income markets.
The IMF staff has said the yuan now meets the qualifications for inclusion in the SDR basket, and the U.S. is apparently ready to support the move.
But make no mistake — this is still largely a symbolic move for China’s currency.
SDR inclusion is a symbolic, not substantial, move for the yuan
The SDR basket is set up as a kind of overdraft account for IMF member countries, convertible into dollars, euros, pounds and yen. But we’re not talking about a great deal of money here.
According to Bloomberg, the outstanding value of SDRs is just over $300 billion, which is only 2.5% of global currency reserves.
And the yuan is not very widely used compared with the other four SDR currencies. At the end of last year, it ranked eighth in international bond issuance and 11th in global currency trading.
At least initially the yuan will account for only a small fraction of the SDR basket anyway, which is now dominated by the U.S. dollar with roughly a 40% weight with the euro accounting for a slightly smaller share.
Over 80% of total foreign-exchange trading involves the dollar today, so adding the yuan to the SDR mix isn’t likely to create much competition for the buck in terms of global currency dominance.
If anything, it’s the stature of the euro that is likely to be diminished. After all, its role as a global reserve currency has already been tarnished by the ongoing European sovereign debt crisis.
And as far as triggering massive shifts in global currency markets, don’t expect a tsunami of money to move into the yuan overnight.
In fact, JP Morgan estimates the IMF’s blessing could result in about $350 billion moving into Chinese bonds over the next five years, a subtle reallocation of reserves. And that’s just a drop in the bucket compared with the $1.3 trillion worth of U.S. Treasurys held by China today, not to mention the $12 trillion in total currency reserves held worldwide.
Bottom line: Don’t believe the hype about a coming collapse of the U.S. dollar as China’s yuan soon becomes the global reserve currency of choice. That’s NOT about to happen.
It will take years for the yuan to become a true international currency, as widely used as the dollar is today for funding and investing. There’s no doubt in my mind that day will come eventually, but not anytime soon.
Good investing,
Mike Burnick
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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
{ 22 comments }
Just another nail in the demise of the $ in the future
Oh! one other thing,how the hell are you expected to trade in the yuan if there aint none to trade
China surpassed the USA for GDP back in Dec of 2014, so China has the largest economy in the world now and growing at a faster rate than the US.
Your statements are true and I find it hard to believe that very few people know this. They still think the USA is still #1 in GDP. They are also numb to the fact that China’s economy is growing faster than the US. You posted some good points John.
China is trying to slowly gain control the IMF (World Bank). The SDRs are an attempt to become the world currency. Obama is not opposing these actions. If it (when as it appears now) happens, this will be disastrous for the U.S. The coming Depression could upset the China apple cart.
No, not true as far as China trying to gain control of the IMF.
They just want to be part of the Worlds Status nations.
They want a say in Global Events.
The big plan is to phase out Cash and have an entire world tied to the ‘Electronic’ transactions.
Just think, if a nation steps out of line, based on global laws, the IMF will be able to Freeze that countries accounts, once cash is no longer accepted.
While on the surface, this will sound Wonderful to the Majority, as they will say it will stop terrorism and rogue nations will just be blocked from trade (Once their currency is ‘Frozen’), and stop crime, since they will take known drug lords Digital Accounts and Freeze them. Yep, these would be Powerful Tools!
Now, let’s say Laws are written by a Tyrant and if you disagree it wont matter.
Let’s say the IMF tells the Central Banks that they need to pay off their debts, by Forcing TAXATION on their people, or Their Currency will be frozen…
Or say the UN goes to the IMF and says ‘freeze Americas account’, until they Demand all Guns be turned in and tossed into a melting pot, because ‘Guns Kill’ people.
Let’s say all of those who have registered firearms with big brother, comply or have their Electronic Account Frozen…
Paranoid? No, Realist…
See where this is heading? All the Lawful Citizens will be forced to turn Their weapons in, but does anyone think the Criminals will conform?
I just hope the Majority demand their Government Representatives to keep CASH in the System.
We all Know how so-called ‘impenetrable’ sites are continually making the news.
What happens when some Hackers are able to shut down the entire grid?
I guess that is where Gold will make its comeback, once the informed start stocking up on the Commodity, for just the reasons mentioned above.
There are Surely other scenarios that could happen.
Wow, Leadzep, I can’t imagine many of the millions of hunters in our country turning in their weapons with some UN directed IMF plot. I can quote my brother in that regard, “Ain’t no way!”
Reserve currency?! The IMF needs to review China’s demographics: Ageing population, male: female ratio [ 10 to 1 ] China’s tight government control over it’s currency!! China’s an export country. Who’s going to buy when Europe and the US stop buying and begin saving for retirement!!
But make no mistake — this is still largely a symbolic move for China’s currency.
I Agree, for now.
That 2.5% will be increasing month-by-month though.
The IMF will then dictate Interest Rate Policy and will wield the power to manipulate economies.
That is what this is really about, phasing out Paper and having Control over Nations who don’t want to Abide by Global Authority.
This is leading down a Dangerous path, that will surely come back to haunt those not paying attention.
By the combination of controlling Exchange Rates and phasing out Paper, the IMF will be able to Force Inflation as they see fit.
Whatever, by then I will have hopefully ‘checked-out’.
Do you even know what the IMF is? Its a clandestine “bank” based in washington dc. This institution serves at the pleasure of the US. I’m not saying that China couldn’t attempt to get control of worldwide currency flow, but it certainly won’t be through the IMF…
if not already there, lots of contracts involving the yuan will get new language that set ‘value’ at the time of the deal agreement, and actual payments will be allowed to float to match value when/as ‘adjusted’ by the Chinese Gov….they seem to be limiting their ability play with values…
Nothing in international finance happens overnight, but my contention is that the seeds for the dollar’s diminished status is sprouting. First, OPEC is the primary reason for the dollar’s dominance in world finance. We’ve ticked them off with our support of IRAN, so ongoing support for the dollar is questionable. Also, Russia a leading oil exporter now uses the dollar and if they switch to the Yuan, things will start to change more quickly. My opinion is that your efforts to assuage concerns is a bit optimistic.
What would happen if, in a future attempt to re-balance the SDR basket, they include gold reserves? An audit of gold reserves could rapidly swing the values of these currencies and empower the Yuan to be the new powerhouse (reserve) currency. Having the Yuan in an open international forum is a dangerous game for a dollar which lives off it’s former glory, but is largely bankrupt.
If the yuan isn’t going to affect the dollar, how come friends who have gone overseas say they are not able to use the dollar as they always have. It is no longer readily accepted.
Hi Mike
In recent years there has been a rapidly growing transfer of overseas assets bought and paid for by wealthy Chinese residents. Land alone through Chinese investment funds have increased their holdings of key agricultural properties presumably paid for in their currency transfers of choice. Confidence in a currencies general acceptance will depend on genuine free market terms. This may take some time for this to happen on a broad scale.
Mike, you have to include anytime the topic is currencies comes up, that you are talking about trash on trash. The paper just represents bankrupt nations. Dean Rockey
While my sense is that I agree with your conclusion that the yuan’s acceptance as a major world currency is years away, when it does become an acknowledged player how will their on going posturing in the gold market effect the status of precious metals?
If down the road, the SDR is used as the World’s reserve currency to “bail out” the next massive downturn after the bubble bursts, it would allow nations to Inflate away their debt and since the IMF is not a country, there could be no restrictions on how many SDR’s are issued. One “token” based system for another would result, but the game would remain the same.
China’s not looking to over take the influence of the U.S. currency abroad, they simply want to establish a geographical reach that excludes OPEC’s current power by lessoning the economical (sdr), resources we have against them moving forward. There country is rich in resources from commodities to man power & its still mostly untapped. The U.S. has far to long shown militarily superiority in effecting China’s & Asia’s way of business in regards to controlling shipping lanes and trading currency. They want us simply pushed back while they continue to build an infrastructure we cant spy on electronically or dictate its expanding financial claim on bordering & trade nations borders. The currency change of status will bring in large amounts of revenues we have currently taken for granted over the last 30+ years. How long would u like to exchange your dollar for the yuan before u said enough? This will cut the time in half for China to build out militarily over the Asian sea. Look for a formidable fleet in 10-15 years. (If Hillary gets elected). I also believe they would be willing to all but burn our currency if we continue Q.E style economics they’ve seen Japans 20 year economic collapse. China could easily dbl there 1.3 trillion in U.S. debt if they believed it served there greater interest. Our Q.E. has given China all the more reason to expand there own influence through out Asia while lessoning our currencies localized favored status any way possible. They copy and then ship there/our goods back here for us to purchase and under cut our own labor force and manufacturing well-being. Does anyone not think they could ramp up production on exports if this was the primary way to assert its geographical power? They just have over this decade alone. We should be thankful our border doesn’t belly up to China like Japan.
I have ran a welding, machine shop for over 50 years. A while ago I cleaned out an old file from the 60’s. It takes $100.00 to do now, what $10.00 would do then. Will not be to long before the Dollar is not worth anything. Buy steel, lead, and copper.
All remarks are very enlightening! But I have no reply!
very nıce sure.