Case Study: Do Yuan to Buy Some Renminbi?

Introduction

The case study is an overview of the expected importance Chinese currency Yuan has in the global market (Daniels and Radebaugh, 2015). China has become a leading economic giant and its currency can play an important role in the world economics especially Chinese dream of becoming world’s No.1 economy. In the following discussion I have answered the questions posed at the end of the case study.

  1. Why is it important for the Yuan to become a major world currency?

China has emerged as an economic power. It holds a huge chunk of world’s population. For it to maintain its international status and become the No.1 economy, it requires to gain an international status for its currency. Chinese GDP is at rise which could help Yuan gain the confidence of the national and international markets. For any country to claim to be an international economic power, it is important that is currency is widely used in the world. Therefore China should strive to use its economic stature to make room for Yuan in the world if it wants to be an economic super power.

  1. What needs to take place for the Yuan to be listed right along with the U.S. dollar and the euro as global currencies?

There are different factors that influence the transaction of Yuan from a China specific currency to a currency that is listed right along with the US dollar and Euro as global currencies. First is the fact that China needs to maintain it economic growth rate. This growth rate will give China to have high ranking in the world economic powers and international investor will trust China for investment.

China needs to adopt to a sophisticated financial system to gain the trust and confidence of the international community. This sophisticated system must be capable of safeguarding the financial interests of the international investors who do business with China and in its national currency. This financial system should be technologically advanced and should be capable of handling the financial transactions in an efficient manner.

China also need to create an environment of trust in its RMB in the world market. For this purpose China would need to keep its currency stable and also available for international transactions. In the recent years it has been observed that China is quite reserved in dealing with issues related to the settling the international value of its currency which sends out negative signals (Irwin, 2016).

  1. Why is the Chinese government so hesitant to open up the Yuan to market forces to determine its value inside and outside of China?

China has some internal issues that might be stopping them from opening up Yuan to market forces. First is that they don’t want the outside market forces to see what the inflation inside China is. China is a country ruled under one party. The society is not democratically evolved yet. There is a centralized system that focuses on keeping secrets rather than opening up to the international market forces. Inflation rates actually do influence the behavior of the international market forces in evaluating the value of a national currency. Same is the case with high interest rates inside China. High interest rates influence negative on the value of a currency. This could pose to be an indicator of an economy based on weak financial foundations.

  1. What roles do foreign banks like HSBC and electronic platforms like Thomson Reuters and ICAP play in helping the Yuan move closer to becoming a global currency?

HSBC and Thomas Reuter have a global presence. They have the ability to get Yuan in to the floating exchange system against the US dollar and Euro. HSBC and likes have a global presence. These banks are responsible for transactions in different world currencies. China, just like other world countries are dependent on banks like HSBC to provide Yuan an international boost and start to accept worldwide transactions in it . China would definitely avoid Yuan have a lesser presence vs its competitors, USD and Euro. To encourage the use of Yuan, China would need to use all its influence to agree with HSBC and Thomson Reuter and likes to accept Yuan from all over the world as an intentional currency. China need to expand offshore access to Yuan and not just trading inside China and Hong Kong.

Due to an increase in electronic trading and especially online transactions, Yuan can emerge as a world leader due to the fast growing exports of China. Yuan would need to be widely accepted by international financial institutions like PayPal, Thomas Reuters and ICAP.

  1. If you were to predict what the foreign exchange trading world will look like in 2014 when the Bank for International Settlements issues its next triennial survey in foreign exchange, what would you predict?

As far as Yuan is concerned, Chinese government would never give up its control on it. I do not predict higher changes in the position of Yuan in the near future on the global arena. China is not open to market forces which would be helpful in getting Yuan the well-deserved place in the world. Yuan is and would be considered a major currency due to the volume of Chinese economy and the global presence of the products made in china. More and more businesses want to divert their attention to China. China is showing resistance to increase the value of Yuan in the international market that also limits its use in the international market by creating an environment in the international market.