China Yuan Becoming Reserve Currency Essay example
Can the Chinese Yuan become a Global Reserve Currency?
Fort Hays State University
ECFI 644 International Economics
April 30, 2012
Dr. Dosse Toulaboe
China’s economy is growing ever larger, but is that enough to get the Chinese Renminbi (more commonly known as Yuan) to be accepted as a global market currency? This paper will look into the liberalization, but with Chinese characteristics, of five determining factors in becoming a country whose currency is a global reserve currency. These factors are as follows: economic size, macroeconomic policies, flexible exchange rates, financial market development, and finally having …show more content…
Nevertheless, China’s debt markets are far behind those of other reserve currency economies, as you can see in figure 2. According to the International Monetary Fund website, “Without a sufficiently large debt market, the renminbi cannot be credibly used in international transactions. If there is insufficient liquidity in markets for renminbi-denominated debt, the currency will not be attractive to foreign businesses” (Prasad, 2012).
Figure 2 [pic]
However, even through China’s financial market is developing, it is necessary also to boost development through having a more open capital account.
Open Capital Account
Over the last thirty years China has become much more liberalized, however they still significantly lag behind the U.S. and U.K. because of tight government controls. Portfolio investment, debt financing, and overseas direct investment still have some of the tightest restrictions.
Using an index of capital account liberalization