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Page added on July 6, 2013

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China’s Currency “On Its Way To Becoming Global Reserve Currency”

Public Policy

Following the most recent shift ‘away’ from a USD-centric world (with the China-Australia direct currency convertibility), it seems the possibility of China’s Yuan as the next global reserve currency is getting closer. The Brits, Germans, and now the Swiss (who just signed a free-trade-agreement with China) are all actively vying to become Europe’s Yuan trading hub as it seems the long line of developments to internationalize the currency over the past two years. As Bundesbank board member Joachim Nagel noted in a speech entitled “Reniminbi as a potential reserve currency” this week, “the Chinese currency is well on its way to becoming one of the future global reserve currencies.” He noted that, although the USD is still the most commonly-used currency for settling trade with China; from virtually zero in 2010, the Yuan is used to settle over 12% of trading transactions now – and is likley to increase further.


Remember, nothing lasts forever:


This latest development in global currency relations should come as no surprise to those who have followed our series on China’s slow but certain  internationalization of its currency over the past two years. To wit: World’s Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade“, “China, Russia Drop Dollar In Bilateral Trade“, “China And Iran To Bypass Dollar, Plan Oil Barter System“, “India and Japan sign new $15bn currency swap agreement“, “Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says“, “India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees“, “The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap“, and “Thanks, World Reserve Currency, But No Thanks: Australia And China To Enable Direct Currency Convertibility.”


Via Deutsche Bundebank (Dr. Joachim Nagel),

Renminbi as a potential reserve currency

According to Bundesbank Executive Board member Joachim Nagel, the Chinese currency is well on its way to becoming one of the future global reserve currencies. This potential stems from the renminbi’s increasing convertibility, he said at a conference of the Chamber of Industry and Commerce in Frankfurt.

He emphasised that although the US dollar is currently the most commonly used currency for settling trade with China, the significance of the renminbi has increased greatly over the last few years. He underlined this by referring to figures published by SWIFT, which indicate that the percentage of trading transactions settled in renminbi jumped from virtually zero to around 12% between 2010 and 2012 – and is likely to increase further. In view of this, he pointed out that the renminbi has already achieved the status of a trading currency.

Drawing parallels to the Deutsche Mark

Mr Nagel compared China’s growing importance with the German economic miracle of the 1950s and drew parallels between the renminbi’s current growth and the development of the Deutsche Mark. Thanks to the recovery of the German economy, the country accumulated a large volume of foreign exchange reserves and the Deutsche Mark acquired the status of a global investment and reserve currency, he explained. He anticipates that “the renminbi is certain to have similar long-term prospects if market access is liberalised further”. Mr Nagel backed up his comments by citing a survey of reserve managers carried out by RBS. The survey revealed that 14% of reserve managers have already invested in renminbi, with 37% of respondents considering investing in the currency in the next five to ten years.

Mr Nagel sees the renminbi as currently transitioning from a being trading currency to an investment currency. While both inward and outward direct investment is now possible, portfolio investments will continue to be regulated, he remarked, adding that improvements are expected in this area. “The internationalisation process of the Chinese currency is taking place more gradually than was the case with the Deutsche Mark, which, at times, was subject to radical upheaval”, he added. Mr Nagel recalled, in this context, the collapse of the Bretton Woods system of fixed exchange rates and the crisis in the European Monetary System at the beginning of the 1990s.

Renminbi financial centre in Frankfurt

Mr Nagel noted that “given China’s growing economic importance, the internationalisation of the renminbi seems long overdue”. He explained the Chinese government’s decision to employ offshore trading centres, which would allow China to establish its currency internationally, while protecting its domestic financial system. Hong Kong, where around 80% of all renminbi trade is settled, is by far the most important trading centre for the currency, with London and Singapore each accounting for 4% of renminbi trade since mid-2012. He added that the expansion of the market has led to the growing significance of other financial centres for renminbi.

Mr Nagel welcomed Frankfurt’s endeavour to position itself as a trading hub for the Chinese currency, calling it a step in the right direction, towards the free movement of capital. “The high level of interaction between China’s and Germany’s real economies highlights the necessity for a more active renminbi trade”, Mr Nagel remarked, “perhaps even using Germany as a hub”


Full Speech available here.


10 Comments on "China’s Currency “On Its Way To Becoming Global Reserve Currency”"

  1. Arthur on Sat, 6th Jul 2013 8:45 pm 

    Three months ago I wrote my longest blogpost ever, initiated by the intruiging diagram above:

  2. LT on Sun, 7th Jul 2013 12:24 am 

    Nah! will not!

  3. LT on Sun, 7th Jul 2013 12:24 am 

    Nah! will not!

  4. GregT on Sun, 7th Jul 2013 3:29 am 

    This has been well understood for decades. Not a matter of if, but a matter of when. The price that is to be paid for cheap labour, and cheap consumer Walmart crap.

  5. BillT on Sun, 7th Jul 2013 5:18 am 

    As the West breaks up, the East rises and unifies. Nothing new here. Change is all that is permanent. There will be several reserve currencies, not just one and that will break up the monopoly of the West. And about time!

  6. dave thompson on Sun, 7th Jul 2013 7:44 am 

    The Federal Reserve will not let this happen.

  7. Arthur on Sun, 7th Jul 2013 8:43 am 

    The FED is not all powerful.

    “As the West breaks up, the East rises and unifies. Nothing new here. Change is all that is permanent. There will be several reserve currencies, not just one and that will break up the monopoly of the West. And about time!”

    Sometimes Bill, I wonder where your loyalties are. Although you convincingly sound like a Euro, uhh excuse me, a Caucasian, you have this tendency to glorify Asia and somehow see them immune for the impending depletion desaster. And why would an end sixties American of German descent abandon his roots in the US to live his final decades in the jungle in the Philipines? I can think of a reason.

  8. BillT on Sun, 7th Jul 2013 3:12 pm 

    Actually Arthur, I have no political ‘loyalties’ and not much ‘patriotism’ for the US. It was the home of my family for 280 years, but I no longer am proud of that fact.

    Asia is not immune, just better able to adjust than the West will be. Most of the people here still know how to live without techie stuff or even oil. I can live that way if it means I can go on living and enjoying life. I have found that less is more.

    I can enjoy the sun coming up over the Pacific and setting over the mountains to the west towards China. I do not fear China. I fear my own government far more.

    We already grow much of what we would need right on the farm. I might need to learn to eat things like monitor lizards and turtles, but I have eaten many things in my 68 years. Most parts of pigs and beef you probably would never touch. Heart, kidneys, liver, stomach, tongue, skin, etc.. ^_^

    And, if you think sex is the reason…lol. You are not 68 years old. You are a youngster that still believes he will be a sex hound all his life. You should not assume things. ^_^

    Did it ever cross your mind that I might just want to spend my last 20-30 years someplace new? After all, the first family member to come to North America was an Austrian sea captain looking to retire in a new land and leave the place his family had lived for countless generations? When a place no longer holds a good reason to stay, why not leave?

    I love it here. I do not love the US of today. The people here are not smart ass’d youth who look down on their elders. I am treated with respect and courtesy. Something sorely lacking in the States. And the cost of living is about half that in the US. So, why not live here? There are over 250,000 of us American expats ‘roughing’ it here in the land of eternal summer. ^_^

  9. Arthur on Sun, 7th Jul 2013 5:56 pm 

    Well, I am happy for you Bill, that you have the remarkable ability to adapt to a radical new environment, chapeau.

    For me the Dutch saying, that would translate to “old trees should not be replanted”, would apply. But then, I have the same hairdresser I had 55 years ago.

    “And, if you think sex is the reason…lol. You are not 68 years old. You are a youngster”

    Haha, quite a youngster with end Well, the need for sex might ‘phase out’, but not the need for aesthetics or a little tenderness every now and then. Nothing wrong with sharing an apartment with a consenting lady. That’s what I would be tempted to do. But I do not have to. I think I stay where I am, except that maybe in a few years, if the economy has not fully tanked by then (a big if), after I gradually wind down working, I could be tempted to start the elderly habbit of hibernating in a more southern country, like Spain or Greece or Sicily.

  10. BillT on Mon, 8th Jul 2013 1:35 am 

    Go for it! You will be rejuvenated and feel 20 years younger. ^_^

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