In the Year of the Dragon, let’s pay attention to the Chinese yuan. It seems there is not something interesting about it. But don’t you know, there are actually two yuan? And both of them are Chinese. This is a rather strange and atypical monetary system. Interesting? Read on.
Can the yuan replace the dollar?
The Chinese currency is often mentioned as one of the possible alternatives to the US dollar as a reserve currency. Today this is impossible. This is also unlikely in the near future.
The fact is that an important condition for using a currency as a world reserve is the openness of the financial market and the country’s economy to the rest of the world.
For example, the way it is done in the USA, where almost any foreigner can invest in the stock market, engage in entrepreneurship, and interact with the banking system.
Being a foreigner, one does not simply buy a share on the Shanghai Stock Exchange, open a company in China, or use the services of their banking system. The Chinese authorities do not allow such interference in their economy. They are committed to strict control of everything that concerns these areas.
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A continuation of this policy of isolationism is the double yuan system. There are two of them: the foreign yuan (CNH) and the domestic one (CNY). These are two different tickers. The system is structured as follows.
Two Chinese Yuan – How does it work?
The domestic yuan is issued by the China Central Bank, and the foreign or offshore yuan is emitted by the Hong Kong Monetary Authority (HKMA). The exchange quote is usually one-to-one, but there may be fluctuations of 2-3 percent.
The exchange process is also not purely market but occurs with the permission of the Central Bank of China. In order to receive CNY, you need to go through a special administrative procedure and export some goods to China.
If you have seen the CNY ticker on any exchange and have access to trading this symbol (for example, on the MOEX), then know that the exchange is simply misleading you. In fact, this is still the same offshore yuan CNH.
Thus, the foreign yuan rests solely on the authority of the Central Bank of Hong Kong, which for the last decade has ensured the parity of CNY and CNH, and, of course, a stable exchange rate of the Hong Kong dollar to USD.
This leads to the fact that it is possible to speculate in the yuan, but it is not possible for central banks to use it to create international reserves. Since the domestic yuan will not be sold to anyone just like that, and the foreign yuan is not backed by any economic assets of mainland China.
Two Chinese yuan – That’s not all
The two Chinese yuan is not the only element of the financial system that is important. There is another sign that makes us understand that the yuan only looks like a possible alternative to the US dollar, but cannot be one. I’m talking about the so-called trade balance.
Look, if a country wants its currency to be used by investors and banks from other countries, then it must ensure that there is a lot of this currency abroad. In other words, they need to buy a lot of foreign goods so that citizens consume them and pay foreign suppliers with their currency.
But they need to sell their goods less than buy foreign ones. Then the trade balance will be negative (imports are greater than exports). In China, it’s the opposite. The balance is positive. China does not have a domestic consumer rich enough to flood the world with yuan.
It is common knowledge that China, on the contrary, sells many of its goods abroad, which are bought by richer Americans, Europeans, etc. That is, to compete with the dollar, the average Chinese must become richer than the average American. You do understand, that this situation exists only in plans.
Natural result
This is the system of two currencies built in China. The two Chinese yuan serve to solve a range of problems that do not imply their use as a full-fledged alternative to the world’s reserve currencies, that is, the American dollar, euro, pound, and Japanese yen.
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