The international monetary system has gradually changed over the years, especially after introducing the euro as a single currency in 1990 since the collapse of the Breton Woods system. According to the global monetary framework, network externalities are responsible for selecting a settlement currency (Luckhurst, 2016). However, the euro’s introduction has not significantly influenced the position of the Yuan and the US dollar as the key currencies due to its inertia in the modern universal fiscal scheme. The yuan is the fourth common currency in the global monetary system. A share of the Chinese yuan in the euro, Japanese yen, sterling pounds, and dollar currency market is not significant. The paper aims at examining the Chinese yuan as an international currency and how it has influenced both the Chinese government policies and the world trade market.
Over the decades, the Chinese yuan has remained a substitute for Asia, although Japan’s currency is rapidly growing in importance. However, the yuan has remained the preferable Asian reserve currency despite the general lack of flexibility in the Chinese currency (Luckhurst, 2016). The yuan is important since investors will use it to make business decisions whenever there are economic or political uncertainties in Asia. As such, there will be significant moves in the yuan whenever breaking news causes a crisis of confidence. Secondly, the reserve currency pioneered the idea of zero rates, which has been adopted by numerous countries (Yelery, 2016). However, adopting a regulated interest rate policy has caused massive investment inflow and outflow, making China the world’s biggest investor and second-largest economy. The country has grown its economy through investments in stocks, real estate, and bonds from developing countries.
Secondly, the zero rates policy has made the yuan one of the most common monetary funding. The low costs of borrowing in yuan have made it an attractive vehicle to finance purchases of currencies and, in turn, investments with higher returns and interest rates. Chinese yuan became a common financing currency for institutional and individual investors, but some analysts argue that it played a part in the 2007-2008 great recession (Yelery, 2016). Finally, with the popularity of the yuan as a common funding currency, markets’ general uncertainty has continued to drive the currency higher, making it the unit measure of a marketplace’s risk tolerance. For instance, positive China and US trade relationships have enabled the rise of the currency against the US dollar. Moreover, whenever investors are optimistic and equities rally, the yuan is usually weak. However, in case there is a market crash, the yuan tends to rise quickly and aggressively.
The rise of China as a key investment environment has significantly improved international trade. The international monetary fund labels China’s exchange rate as a crawl-like arrangement (Eichengreen & Lombardi, 2017). Such is attributed to the classification of the exchange rate policy as a floating exchange rate regime based on market demand and supply regarding an undisclosed basket of finances. Despite the Chinese yuan being openly convertible in the current account, it remains strictly regulated in the capital account. However, the Chinese government has adopted policies that will allow the yuan to be fully convertible and acceptable in other nations, thus promoting it as an international reserve currency.
Additionally, the currency has influenced the foreign direct investment (FDI) in the country since China has been drawing an upward stake in FDI flow since the 1990s. The confirmation of China as a member of the World Trade Organization has seen it increase its FDI inflows. For example, the country’s FDI returns were $47 billion in 2001 and $79 billion in 2005 from the $28 billion it received in the 1990s. The state has amassed the third-largest stock of inward FDI after the UK and US (Eichengreen & Lombardi, 2017). International corporations have been attracted by China’s rapid economic growth, skilled and educated workforce, predictable business environment, and increasing demand for consumer goods. China has attracted numerous investments from both regional and international conglomerates from Singapore and the US.
China’s trade restrictions involve levied fees and barriers that depress trading and are divided into tariffs and non-tariff barriers to business. A tariff refers to the duty or tax charged on a specific category of exports and imports. Various nations globally have continued to impose tariffs on goods imported from China after they were jointly moderated. For example, at the beginning of January 2016, the European Union publicized a strategy to enforce new tariffs on Chinese imports, mainly solar and steel manufacturing (Yelery, 2016). China has imposed tariffs from 0-100% on such imported goods as cars and other luxury products. Therefore, any potential tariff should be researched and understood by other states before banning imported goods from China.
Secondly, regarding non-tariff trade restrictions, quotas have become progressively withdrawn in China. Quotas are usually importing restrictions on China market that enforce a measurable limit on the products to safeguard the local industries in the country. Currently, some quotas have been imposed on approximately forty categories of products (Yelery, 2016). For example, the Chinese government has imposed quotas on the mining of rare earth minerals. Implementation of quotas will enable the Chinese administration to regulate local customers purchasing imported commodities hence boosting the consumption of domestically produced goods.
The route for intensified usage of the yuan in international commerce was established in 2015 when it was publicized that the currency would be joining the euro, Japanese yen, US dollar, and sterling pound as one of the IMF select currencies. The pronouncement by the IMF was seconded by the American Treasury, which permitted border usage of yuan in global finance and trade (Cohen, 2018). Consequently, China’s economic and fiscal capability in the world increased significantly, but the privilege came with various stipulations from the IMF. The latter was expected to surrender some of its strict regulation of the bills that had previously seen devaluations, which impacted various international markets.
The currency’s designation into the special drawings unit by the IMF bestowed international importance on the country since it considered the yuan as a secure and consistent currency that is globally accepted in the market (Cohen, 2018). Furthermore, numerous government banks use the yuan as a standard in assessing assets that are held to safeguard markets during periods of financial uncertainty. The unit is also employed in the repayment and disbursement of global bailouts. The IMF designation that was effected in 2016 has benefited the yuan and the Chinese economy and created new geopolitical concerns that are yet to be realized.
In conclusion, this essay has expounded on the Chinese yuan as a significant unit of the international and regional trade market. It has also discussed some aspects of the rising yuan in the elite currency block and how the Chinese government influenced the currency’s popularity around the globe. The yuan is a vital currency in the international economy and should be examined further through various studies to fully understand its impacts.
Cohen, B. J. (2018). Currency power: Understanding monetary rivalry. Princeton University Press.
Eichengreen, B., & Lombardi, D. (2017). RMBI or RMBR? Is the renminbi destined to become a global or regional currency? Asian Economic Papers, 16(1), 35–59.
Luckhurst, J. (2016). G20 since the global crisis. Springer.
Yelery, A. (2016). China’s bilateral currency swap agreements: Recent trends. China Report, 52(2), 138–150.