Why Yuan Or Renminbi Blamed For Global Imbalances

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02 Nov 2017

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Yuan or Renminbi is exchange currency that being used by China. The G7, the group of finance minister from seven industrialized nations-Canada, France, Germany, Italy, Japan, the UK and the US. The G7 is trying to push China to appreciate their currency, they believe that this is the way to bring a more balance global economy growth.

The G7, particularly US that receive great impact as international currency blame that Yuan is the main cause for the trade deficits and financial crisis. Argue that Yuan has been peg to appreciate against US dollar in a combination of export subsidy and import tariff. Yuan has been growing up to 14 percent and they become much more competitive by exporting goods. Meanwhile, their trade partner, US economic tends to shanks for 1 percent. Therefore, US swift their responsibilities blaming the Yuan cause the trade deficits. The US should not have put the blame on China, as each country has their own national interest in doing things. The US policy has the power to prevent the impact bring by Yuan. The US should look into the internal problem such as the financial regulation, micro economic policy and also the disproportionate consumption.

Yuan has also been blame for creating the global saving gluts as Yuan been accumulating foreign reserves and recycling the foreign exchange by giving loan and lending into the market for US government bond. This easy funding environment has built up the debt in US. In the past ten years, US been facing trade deficits, they are borrowing to meet their spending needs from saving like countries such as China and Japan. This issue can be view in two ways either the Yuan must reduce the foreign reserves and appreciate the Yuan or the US shall increase their domestic saving and tighten their credit condition. Neither should be blame as both had to work together to come out with a solution and global balance shall achieve.

US blame China that holding back the value of their currency and using high import tariff. This has made the imported goods. For instance, the tires imported from US to China had been charge on a 35 percent tariff. Besides that, there is a rapid increase on the demand on Chinese-made-tires in US. This has cause 7000 jobless people as the factory close down. In another point of view, the rapid growth of China had creates job opportunity for the China and reduce the poverty rate to comfortable modernity.

The blame should not be any of the party. The world is liberalized under the globalization. With the improvement in the multimedia, technology, transportation and infrastructure every country become much independent on each other, there are interconnected. It is easy for a trade to happen compare to the old times. A crisis in one country may influence their trade partner as well.

" The role of US Dollar will be diluted in the world economy by 2020". Do you agree? Explain.

After the World War I, United States has taken over the Great -Britain to be the dominant economic power in the world, the role as general reserve currency. US Dollar has been used as the international currency. It is the exchange currency being use in most of the country after the gold currency. The role of US Dollar in the world economy was strong until a fall happens on the US Dollar.

When the great credit crisis hit the US economy on year 2007 to 2009, it has worsen the balance of payment as US been outsourcing and depend lots on the imports. Besides that US depend lots on the foreign investment as well. The fall will influence the growth of US economy. This shows the actual quality of the US economy much better than wealth acquired over years does. Globalization has increase the role of emerging markets and start to question on the need of US economic dominance.

The cyclical reflecting of US is lower than expected GDP growth compare to Euro area, Britain and Canada. The job losses was 4000 rather job created 100000. The unemployment rate was 4.7%. This is one of the causes that made the US dollar devaluated.

The depreciation did shake the confidence of the foreign investor and the portion of investment been reduce. Some of the country had move the reserve currency from dollars to gold. The gold is link to dollar and dollar is linked to all other currencies. The gold has the actual value and the dollar has no value once it is there are crises. Yet, most of the countries still keep the US Dollar but in the way that they have move the investment from debt securities to Treasury bills that the liquidity is higher. This does not prove that there is a massive loss of confidence on dollars.

Japan, Taiwan, Korea, Singapore and China hold US$2.8 trillion as their reserves. The US dollar slips when they reduce the purchasing on dollar and yet the more they buy the higher the expose to potential free fall of US dollar. Hence, in the short term, these countries will not reduce their purchasing on dollar dramatically. It will only cost more harm and damage as the US value devaluate. If it was to the happen, the amount of purchasing can only be reduce gradually.

According to IMF, 66 countries use dollar as their exchange rate anchor, while there is 27 countries been using the euro. The foreign investors like to do their transaction in US market as their turnover and liquidity is high. The foreign central banks tend to reserve currency that is convertible. Liquidity is a big concern as a reserve currency.

The euro currency and Renminbi currency is moving to be the next international currency. The percentage of countries using euro currency and Renminbi is getting higher. Yet there are some challenges to be an international currency. The currency is limited in certain area. For instance, Renminbi can only be use in China or in cross-border trade with China’s immediate neighbor and administrative regions of Hong Kong and Macao. They are not as convertible as US dollar. This problem can be overcome but it consists of a period of time that is unpredictable. Hence, to expand these currencies to be an international currency will be slower compare to US dollar that have first mover advantages.

As a conclusion, the US dollar might be diluted in the future and the status might not be special as it was. There are few other currency that are catching up. Yet, it will not be happen as soon as 2020. Time is need to become an international currency that being accepted by the world.



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