China: The march of the yuan
China signals its intent for the yuan to become a reserve currency soon.
Is China paving the way for the yuan to become the world’s next reserve currency? At the beginning of this month its central bank announced that it was for the first time using its own currency rather than dollars to buy IMF bonds. China agreed to buy $50 billion-equivalent of the Fund’s special drawing rights as part of the official sector’s fight against the international financial crisis. China’s loan is part of a $500 billion emergency pool of funds the IMF is making available to troubled countries through the issuance of SDRs, a currency basket comprising dollars, euros, yen and sterling.
China’s purchase could be interpreted as an accounting move in that the IMF could sell the yuan back to China for dollars, allowing the central bank to diversify its reserves. More likely, however, it is part of a ploy by the Chinese authorities for the yuan to gradually challenge the dollar’s authority as the world’s main reserve currency.
One reason why the Chinese paid for the SDRs in its own currency could be for the Fund to lend the yuan to a creditor nation, which could then use the money to buy goods from China, thereby promoting the use of the yuan for trade and settlement purposes.