How realistic is the Yuan as a global reserve currency?

It’s a popular argument right now to talk about the Yuan de-throning the dollar as the global reserve currency.

What the argument gets right is that the US Federal Reserve is being run by a bunch of fringe-economic theorists who are attempting to re-write centuries of economic theory,  while at the same time ignoring the mountains of evidence that their theories are, for lack of a better term: garbage.   The USD is indeed in serious trouble.   Increasingly, currency swaps between nations create opportunities for non-dollar transactions, and most recently, Russia announced a well-publicized trade agreement with China, selling gas for Yuan.

These rumblings on the playing-field of dollar hegemony have led many to jump to near-term conclusions about the dollar’s demise.   And while no reserve currency lasts forever, it’s important to put the Yuan in perspective:

That day is a long way off.

A very long way to go.

Here’s the problem:  From a perspective of responsible monetary policy, the Yuan isn’t much better, (if it’s even better at all) and from a competitive analysis it has a long (long) way to go to be anywhere close to reserve status.   The Yuan is only recently convertible in a reliable sense.

As the Bangkok Post reports:

Last year the yuan accounted for just 2.2% of global currency turnover — bear in mind the percentage is out of 200% since all currency turnover involves a pair. Still, it’s remarkable when you consider  its share a decade ago was just 0.1%. Data from the Belgium-based Swift also show the yuan moving up in recent years.  In May, payments in yuan accounted for 1.47% of all payments, more than double the figure from early last year.  But when we compare these figures with China’s share of world exports, at more than 12%, we can understand why the yuan is not living up to Beijing’s expectations.

In contrast, BIS data show the US dollar captures 87% of all transactions, implying that any currency, when exchanged, will almost always be with the dollar. That level has varied in recent years but only marginally. A low of 85% was reached at the height of the sub-prime crisis in 2008. Clearly, the dollar is not going anywhere any time soon. 

The BP also goes on to note that the Yuan isn’t exactly second in line to the USD.  Or even third.  Following the USD in global currency turnover come the Euro, the Yen and the British Pound in that order.   The Yuan has a long fight ahead of it, just to place in the top 4.  And at just 2.2% of global currency turnover, it’s got a very long way to go to compete with the dollar’s 87%

The mouse that squeaked.

The mouse that squeaked.

That little yellow line in the first two columns is Yuan.  The third column represents the Bank of Thailand, which does indicate that among regional trading partners, the Yuan is gaining strength.   But still, it isn’t even as powerful as the Yen in among it’s immediate neighbors.   The Yuan is in a distant fourth place to the USD in turnover.   Not second.

What is important in the near term is that the Yuan is now convertible to dollars.  But this is a far cry from competition.

So what to make of the well publicized Russian oil-for-Yuan agreement?

TMB Analytics nails it:

we suspect Gazprom’s announcement was based on a geopolitical agenda rather that any attempt to undermine the dollar 

Yes, indeed.

Does the Yuan bear watching?  Yes.

Is the Federal Reserve presiding over policies that will eventually destroy the dollar and it’s reserve currency status if left unchecked?  Yes.

Is the Federal Reserve going to unwind it’s position?  No.  (And answers to the contrary are simply not credible).

Is the Yuan going to supplant the dollar any time soon?  No.  (Not unless current trends accelerate exponentially)