Rajesh Writes: The article in Economist raises the issue of the Clash of Currencies. The question was highlighted by Economist in a week when Yuan saw an inordinate devaluation made it an interesting read. Yuan has been in the news for all reasons recently. The rise of Yuan as a strong currency was widely discussed in relation to imminent IMF-SDR revision and latest has been its recent devaluation.
These events needs to been seen in perspective. Let us take the revision of basket of currencies in IMF reserves, with Special Drawing Rights (SDR) first. IMF has a basket of currencies with special drawing rights which include the dollar, euro, pound and yen. This serves as a reserve of sorts which is likely to be reviewed in Jan 2016. Yuan is emerging as a strong contender for inclusion. Yuan is already being used for settling trade in a large way. Yuan is already second most used currency in trade financing and the fifth most traded currency. Whilst one criterion for inclusion in SDR is the currency to be widely used for trade, which it qualifies eminently as a country which is a high exporter, the other is the criterion on free usability[1]which is contentious. China places restrictions on how much Yuan can go out of country and places limits on foreign involvement in currency trades. However, by all indications, stature of Yuan is on the rise and its inclusion in SDR is highly likely. The day it challenges the dollar is also not very far. However, it is also a fact that internal political structure of a country indirectly affects a currency’s stature. The dollar is strong because of a strong stable liberal political system of the USA. Therein lie that catch. Will Yuan rival the dollar with the unique political system is the question that this Economist article tries to answer[2]. The recent devaluation of Yuan is explained by some as move to get it closer to full convertibility. There is also a view that this is a step to boost falling exports which can get propped up by devaluation[3]. If it is indeed the latter, it is bad news. Undeniably, the three events, the SDR inclusion, rivaling the dollar and convertibility with its link to politico economic systems are interrelated issues that require to be seen together.
To read more please see http://worldif.economist.com/article/6/what-if-the-yuan-competes-with-the-dollar-clash-of-the-currencies
[1]“China Knocks on the Reserve-Currency Door,” The Economist, August 5, 2015, http://www.economist.com/blogs/freeexchange/2015/08/yuan-and-sdr.
[2]“Clash of the Currencies,” accessed August 17, 2015, http://worldif.economist.com/article/6/what-if-the-yuan-competes-with-the-dollar-clash-of-the-currencies.
[3]Enda Curran, “Why China Devalued the Yuan,” Bloomberg.com, accessed August 17, 2015, http://www.bloomberg.com/news/articles/2015-08-13/why-china-devalued-the-yuan.