There are incipient signs that dollar is losing its world dominance in global trade. According to a recent estimate, it has lost 11 per cent of its share during the last 13 years and the loss is creeping on. Use of multiple currencies in trading of oil and other commodities has revealed this trend. US embargo on Iran's oil exports and recent sanctions against Russia over Ukraine have exacerbated the weakening of dollar in the international market further.
Rise of dollar in international market started after the Second World War when it became the global currency. Trading countries began to reduce their dependence on dollar after the financial crisis in 2008. Entry of Russian and Chinese currencies for settlements in international trade has given an alternative to dollar as the global currency. Of course, the decline of dollar is not recent; it started 13 years ago. At that time, dollar's share of the world currency reserve was 72 per cent. Soon it slid down to 61 per cent.
China's renminbi (official name of yuan) appears to be gradually gathering strength as a global currency of the future. It has become a growing force in global finance. Its use has more than doubled over the past year. It grew to 1.4 per cent of the total transactions in world trade. Though the percentage is far smaller than that of dollar and Euro, the volume is significant. The percentage in jump placed it above the Hong Kong and Singapore dollars and even the Swiss franc, the sixth most used currency in world trade.
International trade finance is overwhelmingly dominated by dollar until now. But the Chinese yuan (renminbi) came closer to it occupying the second place last year ahead of euro and Japanese yen. It accounted for 8 per cent of the transactions in world trade. But it did not set a trend and was a temporary phenomenon. It, however, indicated the strength of yuan and its ability to occupy centre-stage in international finance.
China still maintains firm control on the use of its currency. In spite of this, yuan has become the ninth most traded currency in foreign exchange market. The volume of trading hit US$ 120 billion daily on an average, compared to $ 34 billion in 2010. The gains have come as Beijing has slowly freed the use of yuan for international use. There are now clearing banks for yuan transactions in five international centres: Hong Kong, Macau, Taiwan, Singapore and recently London. The transaction in London market is the most significant as it is the world's largest foreign exchange centre.
Rapid internationalisation of yuan would require much greater capital account liberalisation on the part of the Chinese authorities. In this respect, the Chinese government is seen taking steps circumspectly towards opening Chinese financial market. Further steps to widen the trading band in yuan will hasten this process. Accompanied by a more market- determined exchange rate, the process will gain momentum.
The use of yuan is still much smaller than China's role in the global economy, about 12 per cent of all global trade flows and 11 per cent of capital flows. Its 1.4 per cent share of international transaction is far below the euro's 42.5 per cent and dollar's 37 per cent share. China has been criticised for keeping yuan undervalued to enhance its export strength, aggravating the huge trade deficit of other trading partners, particularly the USA. A few years back, the yuan strengthened from 6.8 per US dollar to 6.5 per dollar. It has since fallen back to 6.2 per cent despite ongoing pressure on it over valuation.
China's fast economic growth and the international pressure had until recently limited the growth of yuan in off-shore lending. International deposits of the currency amounted to 1.5 trillion yuan or $240 billion but yuan loans are minimal. Yuan-dominated bonds have, however, jumped since the government permitted their issue in Hong Kong 7 years ago.
This year, the UK became the first western country in the world to issue government debt in renminbi. "We need to export to fast-growing economies like China," declared Chancellor Geoge Osborne recently. "To do that, we need to make sure China's currency is used and traded here." It has been noted that as China is slowly relaxing its grip on capital controls, providing investors with opportunities to access renminbi while the international financial market has started to respond.
Belated trade settlements have increased ownership of the Chinese currency and a number of countries have now clearing banks and renminbi quotas. Australia recently announced that it planned to hold 5.0 per cent of its reserves in Chinese bonds. This year the UK investors were able to invest directly in small and medium Chinese listed companies for the first time via exchange trading funds. Rather than investing in Chinese companies listed in Hong Kong, investors bought Chinese shares listed in Shanghai. In London, Glasgow, Birmingham and Manchester, bank customers have opened renminbi-dominated accounts with the Bank of China converting their sterling into renminbi. The money is then converted into sterling when it is withdrawn. If this becomes a trend, Chinese renminbi could overtake the US dollar as the world's reserve currency within the next decade. The possibility appears strong and very plausible. With the gradual strengthening of the Chinese economy and market determination of the exchange rate, this will become inevitable. A major readjustment in the world financial market is imminent.
 ataturk.pasha@yahoo.com
Decline of dollar, rise of yuan
Hasnat Abdul Hye | Published: December 18, 2014 00:00:00 | Updated: November 30, 2024 06:01:00
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