By FX Empire.com
Whenever global finances finds itself in a crisis, the international currency system often breaks down, becomes disruptive or unreliable. This occurs either because debtors can’t meet their obligations, or because creditors fear they are not being repaid in sound money or the value of the debt is dropping as the currency is dropping in value.
In the EU today, debtors can’t meet their obligations, where many creditors that trade in USD are worried about the drop in value of the USD.
During times of economic upheaval and uncertainty, discussion concerns whether the US dollar will be replaced or should be replaced as the global reserve currency by the Chinese yuan or whether it will simply are one of a number of reserve currencies that includes the euro, yuan and yen.
Global Reserve Currency in the times of Economic Turmoil
The global reserve currency is “determined “as the one that forms the largest proportion of the holdings of central banks. In general, it is also the currency most likely to be accepted by merchants worldwide. Most commodities are traded in dollar and almost all Chinese export transactions are quoted and paid in USD.
It is estimated that 60% of all foreign-exchange reserves were denominated in dollars, giving the US currency a critical mass. Investors are still comfortable with holding it; despite the country’s fiscal problems, in times of crisis, the dollar is regarded as a haven. It will take a long while for international investors to become confident that a Communist-led government will always respect their rights. Also history teaches that it must be a stable political system with long deep roots.
By 2020 if growth rates are accurate, China will become the world’s largest economy. The nation’s foreign-exchange reserves already give it significant power as a creditor nation. But even if foreigners wanted to hold yuan instead of dollars, there would be constraints on their doing so. And removing the constraints would probably cause the yuan to soar, something that the Chinese are keen to avoid.
The Chinese are just stepping slowly and carefully into the international currency exchange markets and the yuan is not an accepted or traded currency, and it does not have historical numbers and data to allow the markets to comfortably trade and accept the currency. Also Chinese government reports are suspect and are not open to global inspection and verification.
The present monetary system has best suited the Chinese until now because they were eager to find manufacturing jobs for their rural population and grow their economy through exports. One must always keep in mind that China is a communist country, with a different view point on capitalism.
At some point, however, the Chinese may feel the need to do something else with their trillions of dollars in reserves. It is difficult to adjust a communist ideology in a capitalist world.
Originally posted here
