Yuan move hasn't dented the dollar's dominance in global trade

[webfact]

Yuan move hasn't dented the dollar's dominance in global trade
Chalongphob Sussangkarn
Special to The Nation

BANGKOK: -- On November 30 the IMF approved the inclusion of the yuan in its basket of reserve currencies from October 1 next year, when it will join the US dollar, euro, yen and UK pound. This symbolic acceptance of the yuan as a major international currency did not come as a surprise.

China is now the world's largest trading nation in terms of export and import values, and its GDP will likely surpass that of the US in the next two decades. Hence it would be odd if the yuan did not rise as an international currency.

Meanwhile, if China continues to rely on the dollar as the major currency of trade and investment, it will continue to be exposed to US policy and problems. We have already witnessed the problems caused by acute dollar shortages in the wake of the Lehman Brothers collapse, and also how spillovers from US quantitative easing impact on emerging-market economies.

The use of yuan in international transactions has grown with the growth of China's trade and investment in the rest of the world, encouraged by Beijing. The yuan's share as an international payment currency by value has increased from about 1 per cent in 2013 to about 2.5 per cent currently, ranking it about No 4 or 5 among major currencies.

This share will grow larger in the future as more trade and investment between China and the rest of the world is done in yuan. However, the true test of the yuan's importance as an international currency is not whether China's international transactions are made in yuan, but rather whether a substantial percentage of transactions between third parties (other countries) are in yuan. In this regard, the yuan still has a very long way to go.

The dollar remains the currency of choice for third-party transactions. Table 1 reveals the proportions of different currencies Thailand uses to trade with the EU, Japan and other Asean countries. The dollar is the most-used currency, whether for exports or imports and whatever the status of the trade partner's own currency. This demonstrates the dominance of the dollar and why it remains the pre-eminent reserve currency, as central banks need to ensure there is enough liquidity of the core currency used for trade and investment.

The dollar dominates not because the US forces traders to use it, or central banks to maintain it as the majority of their reserves. These are voluntary choices. The bottom line is that the dollar is the best currency to use for international trade because it minimises transaction costs and has extensive potential investment benefits.

Take the example of exchange rate transaction costs in Thailand. Table 2 shows bank transfer sell-and-buy rates in Bangkok for a number of currencies and also the gaps between the rates. The sell-buy gap for the dollar is much lower than for any other currencies. So for exporters or importers who need to change back and forth between foreign currencies and the local currency, the dollar is by far the cheapest currency to use. The yuan, meanwhile, lags far behind.

The primary reason the sell-buy gap for most currencies is large is that there are no direct exchange markets between that currency and the baht. For example, trading yen for baht and vice versa has to go through the dollar. The result is that the gap between exchange rates for the baht and the yen is about 2.74 times that between the baht and the dollar. For the yuan, the gap is about 4.2 times.

Japanese banks have indicated that the reason they don't operate a direct yen/baht exchange market is they want to be able to square their exchange risk position daily, but this is not possible because there are no forward markets between the yen and the baht. Clearly, as there is no spot market, there will not be a forward market. So this is a situation of market failure; government intervention is needed to establish these markets. These forward markets also provide numerous hedging instruments to reduce exchange rate risks for traders and investors.

If the yuan is to eventually rival the dollar as a major international (and reserve) currency, government action to set up direct exchange markets between the yuan and other currencies should be a priority. This will make using the yuan for international transactions more attractive and also pave way for the development of derivative markets featuring hedging instruments that will reduce exchange rate risks when using the yuan. Although some direct exchange markets for the yuan are being established, there is still a long way to go. Also significant is access to deep markets for yuan financial assets. This would increase the potential benefits of holding yuan. Again there is a long way to go here.

Apart from direct exchange markets for yuan and other regional currencies, markets between various major regional currencies also need to be developed. This will facilitate the development of the region's capital markets. Since the East Asian financial crisis, there has been much discussion about the need to develop East Asian capital markets in order to keep our saving surplus within the region, rather than recycle it to finance the US deficit and then have "hot money" flowing back to East Asia with all the problems that it can cause. The development of deep and well-functioning currency markets in the region will reduce the transaction costs of investing and earning in our regional currencies and help to promote the region's local currency capital markets.

Chalongphob Sussangkarn is a distinguished fellow of the Thailand Development Research Institute.

Source: http://www.nationmultimedia.com/opinion/Yuan-move-hasnt-dented-the-dollars-dominance-in-gl-30274698.html

-- The Nation 2015-12-11

[NeverSure]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

[trogers]

So, why does China still rely heavily on the US dollar for international trade? Why not offer to trade based on Yuan?

[craigt3365]

So, why does China still rely heavily on the US dollar for international trade? Why not offer to trade based on Yuan?

Because the international community won't accept it. China would love this, but they've got a long way to go.

I think it's great they are now in this basket of reserve currencies. It will force them to become more transparent. That will be interesting to watch!

[sawadee1947]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

you are right, but..........how long will it take that Chinese technique will rule the markets? And how long will it take till Chinese language will be as important as English. As I can see on the amount of posts....you are the man of the past. The future looks different and still uncertain. But I admit that I dream the way you do. But it's only a dream.

[craigt3365]

There are a number of reasons the Yuan won't be the main currency for a long time. Transparency is a biggie. And the major players know this. As for the language, it's too hard to learn, different characters, etc. Never be the main language. Keyboards would have to be changed, etc. Difficult. And outside China, it's not spoke hardly at all.

[2fishin2]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

you are right, but..........how long will it take that Chinese technique will rule the markets? And how long will it take till Chinese language will be as important as English. As I can see on the amount of posts....you are the man of the past. The future looks different and still uncertain. But I admit that I dream the way you do. But it's only a dream.

It will never change. China will never be top dog in the world NEVER.

[h90]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

That is not complete true.....When I transfer USD to China there is way more costs. Money transfer Thailand--USA--USA--China (It goes over an bank between) and the Chinese exchange USD--Yuan....So lots of costs.

And already now 1/3 of our transfers are Euro not USD. If I have THB on the bank account I don't care much if I send USD/EUR/Yuan.

If an European customer buys in China it would make sense to transfer Yuan or Euro not USD.

But I doubt that the Yuan will be important anytime soon.....OK when Russia sells gas and buys everything else from China Yuan will be the currency but in the rest of the planet not so.

[sawadee1947]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

you are right, but..........how long will it take that Chinese technique will rule the markets? And how long will it take till Chinese language will be as important as English. As I can see on the amount of posts....you are the man of the past. The future looks different and still uncertain. But I admit that I dream the way you do. But it's only a dream.

It will never change. China will never be top dog in the world NEVER.

ignoring the facts will not help you, but dream on

[h90]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

you are right, but..........how long will it take that Chinese technique will rule the markets? And how long will it take till Chinese language will be as important as English. As I can see on the amount of posts....you are the man of the past. The future looks different and still uncertain. But I admit that I dream the way you do. But it's only a dream.

It will never change. China will never be top dog in the world NEVER.

Great as you can see millennia into the future could you also tell me the lottery numbers of next week? Look at the empires of the past...Persia, Greek, Egypt, Rome....they would never have thought that Americans will be the top.

[h90]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

you are right, but..........how long will it take that Chinese technique will rule the markets? And how long will it take till Chinese language will be as important as English. As I can see on the amount of posts....you are the man of the past. The future looks different and still uncertain. But I admit that I dream the way you do. But it's only a dream.

It will never change. China will never be top dog in the world NEVER.

ignoring the facts will not help you, but dream on

For some time he'll be right....10 years, 20, 30?

[sawadee1947]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

you are right, but..........how long will it take that Chinese technique will rule the markets? And how long will it take till Chinese language will be as important as English. As I can see on the amount of posts....you are the man of the past. The future looks different and still uncertain. But I admit that I dream the way you do. But it's only a dream.

It will never change. China will never be top dog in the world NEVER.

Great as you can see millennia into the future could you also tell me the lottery numbers of next week? Look at the empires of the past...Persia, Greek, Egypt, Rome....they would never have thought that Americans will be the top.

why you stop there....Persia, Egypt, Rome...go on, next might be America (top of what? Debts?)

[craigt3365]

Perhaps best to do some research before posting:

http://www.forbes.com/pictures/eedh45fjjlg/no-1-japan/

http://uk.businessinsider.com/wef-countries-with-highest-level-of-government-debt-vs-gdp-2015-10

[Srikcir]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

That is not complete true.....When I transfer USD to China there is way more costs. Money transfer Thailand--USA--USA--China (It goes over an bank between) and the Chinese exchange USD--Yuan....So lots of costs.

And already now 1/3 of our transfers are Euro not USD. If I have THB on the bank account I don't care much if I send USD/EUR/Yuan.

If an European customer buys in China it would make sense to transfer Yuan or Euro not USD.

But I doubt that the Yuan will be important anytime soon.....OK when Russia sells gas and buys everything else from China Yuan will be the currency but in the rest of the planet not so.

the rest of the planet

You forgot Thailand and Hong Kong:

The Nation, December 23, 2014

"The People's Bank of China and the Bank of Thailand signed a yuan-baht bilateral swap agreement (BSA) and an MoU to establish yuan clearing arrangements in Thailand....The BSA is an extension of an agreement signed three years ago.

Under this swap arrangement, 70 billion yuan (Bt370 billion) will be made available for three years, the BOT said... The swap transactions between the BOT and the PBC would provide access for both central banks to the local currency of the other party, Government House said.

Beijing has similar currency arrangements in Hong Kong..."

Unfortunate timing on Prayut's part when China deflated its yuan in Summer 2015. Curiously good timing for China.

[NeverSure]

^^^ This fellow has the facts right but his conclusions are wrong. There won't be more than one international trading currency no matter how exchanges are set up. The reason there is just one currency is to avoid exchanges altogether and therefore avoid the cost of exchange. When everyone will accept that one currency it can just be passed around for buying and selling. Introduce a second currency and you suddenly have exchange risks and costs.

It's just like needing English for international trade. It might sound nice to add Mandarin Chinese as a second language, but it's hard enough to teach the world English. So only one language is needed or even possible if everyone is going to engage each other. That's not mentioning how much of the internet is in English or how much information in technical and other books... It's just not practical to translate back and forth or to learn two languages.

Right now we have one acknowledged language and one acknowledged currency. That won't change unless it all changes and one of them is abandoned. There can be just one of each.

Cheers.

That is not complete true.....When I transfer USD to China there is way more costs. Money transfer Thailand--USA--USA--China (It goes over an bank between) and the Chinese exchange USD--Yuan....So lots of costs.

And already now 1/3 of our transfers are Euro not USD. If I have THB on the bank account I don't care much if I send USD/EUR/Yuan.

If an European customer buys in China it would make sense to transfer Yuan or Euro not USD.

But I doubt that the Yuan will be important anytime soon.....OK when Russia sells gas and buys everything else from China Yuan will be the currency but in the rest of the planet not so.

I don't think you understand. China itself does international trading in USD. There is no conversion of anything. The reason that China has to hold so many USD is so that it can engage in international trade. Few will accept yuan for payment but almost all will accept USD. This is to avoid exchange.

The big boys around the world all trade in USD to avoid exchange. They don't do what you're doing. This is why there's the need for the designated currency.

Cheers.