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Yuan, the next big thing maybe?

Yuan, the next big thing maybe?

By Kevin Gandhi

Edited by Liz Maria Kuriakose, Associate Editor, The Indian Economist

Chinese currency, the Yuan, which has been confined to mainland China ever since its substantial introduction in 1948, has been quite the hot potato lately, after Beijing allowed the currency to be bought and sold outside the country for the first time, early this June.

The Yuan has been in the light of the media since 2009, after China first declared its intentions to promote and make its Yuan comparable to the Dollar in terms of usage and recognition internationally.  Soon enough, the Yuan again hit the front pages when advances were made in London – the world’s largest FOREX market, to uplift its status. Progress was made when the Government of the People’s Republic of China made the China Construction Bank as the official clearing bank for Yuan-related transactions in the Great Britain. It should be noted however, that ever since that announcement was made, leading global markets are competing to acquire and recognise the Yuan for trading and this has resulted in a stupendous growth in the usage of the currency from virtually non-existent to a whopping 400 milliondollars.

The value of the Yuan, however, remains under the tight grasp of the Chinese government, which means that although changes may occur in its value through your average market forces, the magnitude of these changes will not be as inordinate as that of the Dollar or the Euro. It should also be noted that the Yuan is also the second most widely used currency in the world for trade finance. After the aforementioned move of the Chinese government to make the Yuan an international trading medium, bankers in the top finance hubs of the world such as New York, Tokyo, London, etc. are rushing to organise their paperwork in order to accommodate the Yuan.

For the sake of discussion, let us consider the exchange rate of the Yuan in recent times. The aforementioned announcements and intentions of the Chinese government would imply that the value of the Yuan should increase, correct?

No, not necessarily. This may hold true to an extent, however, trends have shown that during the past few months, the Yuan seems to have taken a dive. This ‘dive’ of the Yuan seems to be a by-product of the actions of the United States Federal Reserve. Now although the depreciation of the Yuan has not been as dramatic as other currencies, the fall was still noticeable. Ever since December 2013, the Feds have used a tapering policy on their monthly purchases of long-term assets, which has had a kind of spiral effect on the economies of the world. Taking all aspects into consideration, this tapering essentially makes it more expensive to borrow dollars and invest in Chinese instruments and therefore, its demand decreases, consequently decreasing the exchange rate.

There is one interesting theory, however, that states that the depreciation of the Yuan is the brainchild of the Chinese government and not in fact, the master project of the Federal Reserve. The reason for this is that a depreciated Yuan coupled with its rising international reputation will stir up financial and investment activity in the Yuan abroad, which was the initial plan of the Chinese government itself – to promote the Yuan and make it an international financial instrument comparable to the United States Dollar.

All of these facts are open to speculation related to whether or not the Yuan will achieve its targets, whether its exchange rate will appreciate or depreciate and whether or not the 5-year public relations planning of the Chinese government with regards to the Yuan are successful. The scenario for the Yuan seems promising, but it is too early in the game to make stern declarations or statements.

Kevin is a second year, undergraduate business student at NMIMS University, Mumbai. His hobbies include listening to bands such as Coldplay and Oasis, writing, going on nightly runs and occasionally playing the guitar. He has also participated in various Model UNs across the country. He loves to travel and is an enthusiastic supporter of the Kolkata Knight Riders.

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