Why Yuan can not be the reserve currency of the world
Recently there had been lots of discussions on US disengaging dollar as the reserve currency of the world and Yuan becoming the next reserve currency. Every twenty to thirty years – whenever, it seems, that the American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency. Needless to say in the last few years these warnings have intensified to an almost feverish pitch. There is no basis whatsoever when people say Yuan can be a reserve currency. Reasons to that are:
- The Yuan does not float, and there is no indication China is prepared to allow the Yuan to float any time soon
- China is a command economy
- In China, property rights and civil rights are questionable
- Chinese banks are insolvent because of malinvestments in infrastructure and an enormous property bubble
- Absence of a credible central bank.
- Absence of deep and open domestic bond market.
With the exception perhaps of the euro, which may or may not emerge in the next decade on a more rational basis than it currently exists (albeit with more than one defection), no other currency has the necessary characteristics that will allow it plausibly to serve the needs of the global economy. In practice, dollar liquidity, limited Washington intervention, and the size and flexibility of US financial markets ensure that these countries always stockpile dollars.? There is no real alternative to the dollar, and most other governments would anyway actively discourage massive purchases of their own currencies because of the adverse trade impacts.