EC Not Even PBOC Supports Yuan’s Reserve Role

China’s yuan just isn’t a stable currency. I don’t mean its exchange value, either. CNY floats up and down on the whims of the eurodollar. The PBOC can and does limit the daily trading band, but often at tremendous cost (ticking clock). Therefore, the internal constraint governing this dynamic is a symptom of a world that isn’t going to accept yuan as an alternate reserve.

There are any number of ways to see this in real-time, two above all others.

First, the Dim Sum market. China’s overall bond market is estimated to be around $11 trillion onshore. To become a real, usable global reserve there has to be a robust mechanism for depth and liquidity offshore (I didn’t make the rules). Financial and economic agents must be able to access monetary resources in a ready, efficient fashion. A global reserve, as Robert Solomon pointed out long ago, must meet all three of his criteria:

Long before Bretton Woods was closed down, the eurodollar had fulfilled all three in a novel and very modern sort of way. It was money without borders, a freedom that allowed participants to easily use what was globally available to meet the monetary demands of a globalizing world. The breadth of the system given these parameters is indescribable.

China’s monetary system does not fit these requirements. It doesn’t come close.

Many years ago, before Euro$ #3, spotting opportunity Chinese officials tried anyway. When it looked like the Great “Recession” would hobble the developed world but not Asia, they took a first step encouraging offshore currency in Hong Kong (CNH) followed by offshore bonds. These are called Dim Sum, issued by whatever global corporate (hopefully more banks than not) denominated in RMB.

We often hear about how a reserve currency must have depth, this is one element to it. There has to be liquidity in it, sure, but what does that really mean? Hardly anyone seeks to understand the answer. It’s about plumbing and more, an intense, complex, and, above all, layered infrastructure. Multi-dimensional.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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Gary Anderson 1 year ago Contributor's comment

Chinese companies have huge dollar denominated debt. Weaken the currency and those companies wag the dog, the USA! If Trump tries to run roughshod over China, that will be a likely result.

Alexander Straub 1 year ago Member's comment

Jeffrey, thank you for this very insightful piece into the current economic situation in China. Do you think the deteriorating economics will have an effect on the current trade disputes or are we not at that point yet? The trade issues have been frequently referenced as a cause of the economic instability.