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What the Chinese Yuan Must Accomplish for International Currency Status

It’s known that China manipulates its currency, and is pulling out all the stops to see its Yuan gain full internationalization. The nation has adopted unpopular techniques to reach that goal, including limiting the availability of the Yuan. While most scholars, including Chris Brummer, have taken note of the anomalous currency internationalization process, the main concern right now, how exactly with this end for China? To answer that question, one has to revisit the definition of an international currency and see whether the Yuan measures up to that status, which other currencies like the US dollar and the British pound have enjoyed for decades.

For starters, it’s necessary for a currency to be able to effectively function as a medium of exchange, and that’s assessed based on its approval levels among buyers and sellers as a form of payment for products bought, and for other financial matters. A currency demonstrates this capability if it’s legal tender, and as a question of market practice, approved as carrying an exchange value for a wide spectrum of economic activities. So, how well the Yuan is fulfilling this role as a medium of exchange beyond the Chinese borders is one way to measure its status as an international or potential international currency.

You may also assess currency internationalization based on its success as a means to measure value for items such as products, services etc. Interestingly, a currency may not be a popular means of exchange despite the possibility of being extensively utilized as measure of value. As such, it’s possible to have the cost of goods being assessed in one currency, and another currency being used to pay for them. All the same, if a currency enjoys global popularity as a measure of cost, it means that it’s functioning as the go-to reference point for country-to-country transactions without any market participants necessarily hosting the currency’s markets.

Thirdly and similarly critical, the performance of a currency as a value reserve is tied to its international reputation. Again, this is not a question of how widely accepted a currency is as a means of trade, but whether it can operate as a reserve asset for longest possible. Clearly, when a currency is deployed only as a tool of exchange, but people can’t depend on it as a store of value, it’ll lack demand mainly because companies and consumers cannot keep it for extended periods fearing that their ability to use it may be hurt in case loss of value occurs.

Researchers are still assessing if China may be forced to embrace standard policy for the Yuan to achieve the vital attributes of an international currency.

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