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The Yuan Threatening the USD as the Top Reserve Currency?

The headlines have been buzzing in recent weeks with news of the Chinese currency, the Yuan or RMB, potentially threatening the US dollar’s status as the top reserve currency. Moreover, the concerns over the US defaulting on its debt is adding fuel to the fire, causing anxiety in the markets. But before you start to panic, let’s get the facts straight. The Yuan (CNY), or RMB, is unlikely to surpass the USD anytime soon because it is a non-convertible currency.

Let’s start with the basics: what is a non-convertible currency? A non-convertible currency is a currency whose exchange is subject to restrictions, usually imposed by the government or central bank of the issuing country. These restrictions can include limits on the amount of currency that can be exchanged, restrictions on the purposes for which the currency can be exchanged, or requirements for obtaining permission or licenses to exchange the currency. Simply put, non-convertible currencies cannot be freely exchanged for another currency, unlike convertible currencies.

On the other hand, a convertible currency can be easily bought or sold in foreign exchange markets, with no restrictions on the amount that can be exchanged or the purpose for which it is exchanged. Convertible currencies are more attractive to foreign investors, who can conveniently invest in and divest from these currencies without any restrictions or limitations. By definition, the US dollar is a convertible currency, while the Yuan is a non-convertible currency.

The Chinese government imposes strict regulations on the Yuan’s exchange to limit capital outflows, protect the domestic economy, and maintain stable currency valuation. The People’s Bank of China (PBOC) controls the Yuan’s exchange rates through a managed float system, which means that it manages the currency’s daily trading band. Although Chinese authorities have been expanding the Yuan’s use internationally, it is still not widely traded in international markets. 

Will the Yuan ever become a convertible currency and challenge the US dollar’s dominance? It’s possible, but unlikely to happen anytime soon. The Chinese government has been making slow progress in its effort to make the Yuan more convertible, but there are still many restrictions and limitations that need to be lifted before it can become a truly convertible currency. Generally speaking, as the Yuan becomes more convertible, the less control the Chinese government would have economically, which would undermine their authority. That is something that the Chinese government does not want anytime soon. 

In conclusion, it is unlikely that the Yuan will dethrone the US dollar as the top reserve currency anytime soon. While the Chinese government is making progress in making the Yuan more convertible, there are still many limitations and restrictions in place that limit its use and value. The US dollar’s status as a convertible currency makes it more attractive to foreign investors, and the stability of the US economy makes it a safer choice for reserve currency. While we should keep an eye on the evolving role of the Yuan in international markets, we should not overreact to the news headlines and stick to the facts.