China has recently allowed the Yuan to trade on spot inter-bank markets, showing that it has achieved the ability to compete in the currency market. They did so to promote trade and reduce the cost of currency conversion but also to reduce their reliance on the US dollar. Some say that the Yuan may eventually replace the dollar on the world market.
Russia has also decided to allow its currency to trade on spot inter-bank markets which means that it can trade with China without using the dollar. Trade between those countries is about $40 a year; both these countries are trying to phase out the dollar in their bilateral trade.
China’s Yuan is a stable currency and has been since its introduction in 1948. This is because of China’s exchange rate system that keeps the Yuan consistently rated to about seven Yuan to one US dollar. It will undoubtedly continue this stability due to China’s determination to keep its exports high and its willingness to stick to policies that support those exports. Because of this, unemployment in China has hovered between just 4-5% for the past decade.
The Yuan is projected to rise about 5% against the dollar for the next year or so. In regards to the world currency market, the Yuan is undervalued; economists estimate that China undervalues its currency anywhere from 25% to 40%. This hurts economies around the globe, particularly the US and the European Union. Some say that this undervaluation is a form or trade protectionism, something the Chinese deny. But it is undeniable that the Yuan remains a strong, stable currency compared to other world currencies.
However, China’s efforts to limit the Yuan’s appreciation against the dollar are beginning to come up against a brick wall. While that strategy helps keep their prices low and protects the jobs of Chinese workers in the export sector, China is beginning to see inflation. As they print more and more currency to keep the value of the Yuan low, the extra money feeds inflation. China allows this to continue because a cheap currency is important to achieve their goal of increasing demand for Chinese goods. If the Yuan were to rise, that would mean that goods from other countries would begin to displace China’s exports which would slow the country’s growth.
Nevertheless, the Yuan is expected to rise 5% against the dollar over the next year as China allows some flexibility in their currency. Economists say that the Yuan may become a major reserve currency and it’s not impossible that it could eventually become the world’s reserve currency.