Prospects of Yuan becoming a Global Reserve Currency

China is the second biggest economy of the world and is ready to surpass US by 2016. With such a large population and high growth rate, it won’t be surprising to see China becoming larger than the US economy by 2020 and can become equal in size to developed Europe. But does that indicate that Yuan (Chinese Currency) can become a part of global reserve currency in the near future?? Chinese are going to get such huge benefits so soon? May be or may be not!

As China is becoming a major economic force and its currency is becoming more attractive to the investors so, there are chances that in the near future Yuan can become a part of the global reserve currency.

Currently, the SDR (Special Drawing Rights) currency basket of IMF comprises of US dollar, Japanese Yen, British pound Sterling and Euro. For Yuan to be included in this basket, it must fulfill two criteria: first, it should be used in international trade on a greater scale and second; it should be freely usable. Undoubtedly, Yuan fulfills the first condition but does not meet the second one. China still needs to lift certain restrictions that hinder the currency’s free use or convertibility.

But, seeing the trajectory of Yuan inclusion in SDR, it can be conveyed that sooner or later, Yuan will be included in the basket of global reserve currency. In 2010, the Chinese Government campaigned for RMB inclusion in SDRs,  its request got rejected, but now the prospects for its inclusion in October 2015 are high. In 2013, Yuan constituted 0.7 % of the countries official reserve assets, reaching 1.1 % in 2014. Around 0.6% of international debt securities are denominated in Yuan.

Recently, for its internationalization, China has devalued its currency nearly 2% against the dollar that is 6.2298 Yuan per US dollar from 6.1162 Yuan per US dollar. This was majorly done to give a boost to Chinese exports which showed a fall of 8.3% in July 2015- the biggest drop in 4 months. Also, devaluing the currency is an initial step for ascending its status in reserve currency basket. Devaluation will allow the markets to set the value of Yuan on foreign exchanges and thus making the currency much more acceptable globally.

Definitely, the inclusion of Yuan in the global basket will have direct benefits for the Chinese economy. There will be lower borrowing costs for China. When major cross-border contracts are denominated in RMB terms, then it will ease the foreign exchange risk arising from the US dollars. In addition to this, some of the Chinese initiatives to connect with the neighboring countries like “One belt, One Road” and “New Silk Road” can be easily achieved if Chinese currency will get the international status.

However, US have frowned upon the issue of internationalization of Yuan. United States will try to set roadblock in Yuan’s path of internationalization. This is because Yuan being included in the reserve basket can impose a serious threat to US dollar and thus US power can dwindle in the world markets in near future.