KATHMANDU :The US dollar has enjoyed the privilege of being the world’s favourite reserve currency with most trade around the world in the green currency because of reliability, liquidity and
stability factors. None of the other currencies have been able to surpass the level of the dollar’s attributes.
But analysts have now begun to rate the Chinese yuan as an alternative safe currency, because US share in the
global economy is diminishing while China’s share is increasing. America’s share of global output (20 per cent), trade (10 per cent), and financial assets (about 30 per cent), is decreasing, as flourishing emerging economies are giving the greenback a run for its money. However, many of these economies, including China, still sell their exports for dollar. They still peg their currencies to the greenback. Because of this, the US borrows huge amount of debts at cheaper rate from these economies and China remains at the top. China’s economy has already attained the position of the second largest economy, which would create competition between these two currencies.
China’s economy is likely to surpass that of the US within 20 years. The government is urging firms to settle trade and even acquire foreign companies in its own currency, which will increase the share of yuan as a reserve currency. With the rise in the accumulation of yuan as a reserve currency, it will be more dominant at the international arena. But it requires some trustworthy financial instruments or assets, which are safe, stable, and easily sold. However, the government is reluctant to allow any transactions on these assets. Moreover, it is barely ready to give financial leverage to its own citizens, that is, interest rates on bank deposits are capped and shares largely owned by the state.
So what should the Chinese government do to compete with the predominant greenback? The solution is to lend, invest and acquire firms in foreign countries in its own currency. But the bottom line still holds — China will have to open its
financial doors to the world if the yuan is to be a dominant currency in the future.
(The author is an assistant manager of research and development department at MEX Nepal. He can be contacted through email@example.com)