China’s yuan to become world’s dominant currency
AFP May 18, 2011, 7:33 am The West Australian ©
The rise of the euro and China’s yuan will likely spell the end of the US
dollar’s dominance of the global financial system by 2025, a World Bank
study released concludes. But it also said the International Monetary
Fund’s basket-based pseudo-currency, the SDR or special drawing right,
could also gain weight as countries and businesses seek to reduce the risk
of foreign-exchange shifts.
The study says China will have to internationalise the yuan, officially
known as the renminbi, to better support its industrial and trade
development, and that within just over a decade the currency will become a
powerful alternative to the euro and the dollar.
With the emergence in global industry and trade of new, large economic
powers – particularly China, Brazil, India, Indonesia, South Korea and
Russia – “one sees that their currencies – particularly the renminbi –
will inevitably play a more important role in the international financial
system,” the study says. “A larger role for the renminbi would help
resolve the disparity between China’s great economic strength on the
global stage and its heavy reliance on foreign currencies.”
The study, Multipolarity: The New Global Economy, said the euro is already
offering a credible alternative to the dollar. “Its status is poised to
expand, provided the euro area can successfully overcome the sovereign
debt crises currently faced by several of its member countries and can
avoid the moral hazard problems associated with bailouts of countries
within the European Union.”
But it said that other countries with less powerful currencies will
continue to see policy choices constrained by how the key currencies are
managed and traded. “Unless a country’s borrowing and trade are
concentrated in one of the three key currencies, instability in exchange
rates between the key currencies will lead to fluctuations in
competitiveness and the value of assets and liabilities, impeding that
country’s economic policy making and potentially jeopardising the welfare
of its residents.”
“Some of the challenges facing the international monetary system could
possibly be managed through increased use of the SDR,” it added.
The IMF’s special currency, created in 1960, is already used as an
international reserve asset and a unit of account, though not in trade or
other forms of finance. It is based on the dollar, the euro, the Japanese
yen and Britain’s pound.
“Enhancing the role of the SDR in the international monetary system could
help address both the immediate risks to global financial stability and
the ongoing costs of currency volatility,” the study concluded.