The Chinese Yuan – is this the world’s new super currency?

By Alrick Sangster

The International Monetary Fund (IMF) has added the Chinese Yuan (also known as the Renminbi (RMB) as a currency into its foreign exchange basket of super currencies (effective from 1 October 2016). This has had some economic commentators excited it could mean the beginning of the end for the 88-year dominance of the US dollar.They are predicting the possible emergence of the Chinese currency as the world’s new dominant currency.

The Chinese RMB is determined to be a freely usable currency and has been included in the Special Drawing Rights (SDR) basket as a fifth super currency, along with the U.S. dollar, the Euro, Japanese Yen, and the British Pound. Historically the US Dollar has already superseded its 80 years of dominance and should be replaced shortly if history were the only trend at play here, but it’s not.

Many of us who live in emerging markets in countries like Brazil and South Africa, secretly wish that we would see more world equality on levels including currency dominance. Many are frustrated with Trump’s arrogance and even the shenanigans of Brexit where the Euro dominates as a currency to 55 Countries inside and outside of Europe. To us “third- world” mortals, this subconsciously creates a rebelliousness fueled by years of poor third cousin treatment from the first world. An underlying feeling of oppression, first world control and even an inferiority complex vests inside us where we are somehow wanting the underdog to win for a change. Could this underdog be China? This introduces another question from where we sit, “Should it be China or any other world power that dominates us”. Would it not make more sense if we could introduce a World Universal Currency? Let’s explore the pros and cons of this option.

Benefits of a single world currency:

  • Eliminate inflation
  • Do away with the need of maintaining forex reserves, currency risk, benefiting foreign investors
  • Elimination of transactional costs related to trade currencies, the chance of currency failure, which would make foreign investment decisions much easier in emerging economies.

Some of the key reasons that go against a single currency:

  • Loss of national monetary policy – A single currency would imply a single interest rate. Thus, a region or nation experiencing economic depression will be unable to use the interest rate lever to boost the economy. Similarly, a country with high inflation will be unable to independently raise interest rates to contain inflation. Moreover, Islamic countries, which form a large part of the geography, do not believe in interest rates.
  • Political barriers – Political differences between nations make it extremely difficult for them to adopt a common currency. It can lead to a loss in political sovereignty as monetary interests would need to surpass political interests. This is unlikely to be acceptable to most nations and the idea of a single currency may be difficult to implement.
  • Such a currency would eliminate the problem of current account deficits as there would be no need for foreign exchange. Whilst the benefits seem immense, the adoption of such a currency is not likely soon due to the vast variations in global political, social, religious and economic structures. Take the European Union which is a recent example…and now you have Brexit, the possible beginning of the end of that union. At the time the Union was formed, and the Euro introduced as a currency, most of the countries where socio-economically similar until Greece bombed and it all seems to be falling as Spain and Italy look vulnerable too and Britain pulls out. As the world becomes a global village, let’s hope that our international differences become less as we humanize. Surely our international value as humans should mean more than the currency we represent?

Why not yet my China

In the current trade war with China, Trump has threatened to put duties on most of the more than $500 billion of Chinese goods exported to the United States annually unless Beijing agrees to major changes to its intellectual property practices, industrial subsidy programs and tariff structures, and buys more U.S. goods. China seems to be economically weaker than experts originally thought as markets slow and both its currency and stock markets tumble. Analysts predict that this trade war could continue into November this year with China losing the trade war, fueling a continued US Dollar dominance well into 2020.

China is purposely weakening its own currency so that it could bolster its exports. The question beckoning is just how much more could it slow its own economic growth before capital (investors) seek fresh markets? Meanwhile, the US economy is possibly boasting the highest small business and consumer confidence in decades – a good indicator of the strength of any economy is its Consumer and Business confidence (spend), meaning that “Not now my China” is more than a bit of Randburg slang…it’s a pretty accurate international sentiment.

Whilst the IMF has included the Chinese Yuan into its basket of Super Currencies with the US Dollar, Euro and Yen, it was only its inclusion that has been authorized and that is all it will be for now. It is not going to impact your investments in the short term and if anything, US Dollar strength and dominance looks likely to prevail over the short term at least.

What does this mean for Emerging Markets

The outlook for Emerging Markets remains the same over the short term as we grapple and continue to hope for political stability, less corruption as the first world fights itself until ultimately that disillusionment will somehow eventually lead to consistent investment into our economies…we hope!
If you’re in business, keep doing great things and whilst it is important to be aware of these world events that may have a huge effect on our lives, keep your head down and away from the noise of a barking Trump, a confused Theresa, a rebellious Xi and a stern Putin – just do your bit, earn as much as you can honestly and keep making amazing memories…

Send your financial or investment questions to The Journalist at info@thejournalist.org.za and we will ASK ALRICK to reply.

More stories in Issue 102

Contributors

Alrick Sangster

Alrick is a qualified Financial Advisor, Commercial Banker, Small Business Mentor, Risk Specialist and Financial Commentator. After 27 years of corporate life, his long walk to freedom has landed him in the role of sole director and franchise principal of ZAR Financial Engineering (Pty) Ltd where his quest is helping ordinary South Africans establish a […]

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