NS4960 Spring Term 2017 National Security and the Chinese Yuan

China’s Currency I Mark Miotrowski, China’s Currency on Track to Challenge the U.S. Dollar in Oil Markets, The Fuse October 15, 2015 Overview China’s forthcoming launch of a crude futures contract to be traded with the yuan is another step towards challenging the role of the dollar and the currency’s dominance in oil markets Since 1400s six dominant currencies have been the world’s reserve currency Global power usually associated with a dominant currency – one that has the role of a reserve currency

Reserve Currencies

China’s Currency II There has already been movement in deplcing the dollar in oil deals China overtook the U.S. in 2015 as the top importer of crude oil As major producers competed for market share from Chinese buyers they have been willing to do deals in yuan: Russia, Iran Angola Venezuela, and Sudan Others likely to follow

China’s Currency III Growing use of the yuan in oil trading represents the decline of the petrodollar – dollars earned by producers through the sale of petroleum Shifts will have major implications for the geopolitical backdrop Provides a boost to the new crude futures exchange. IMF meanwhile looking at whether to include the yean in the Special Drawing Rights (SDR) the IMF’s basket of reserve currencies If included a symbolic victory for China Yuan would take a major step in its role as an international currency along side the euro, yen and Swiss franc

China’s Currency IV

China’s Currency V This would enable China to attract more investors With a more liquid market of yuan assets China can accelerate transforming Shanghai into a major international financial center by next decade With 64% of currency reserves in global banks held in dollars China has a long way to go to achieve its goal. Furthermore 60% of the world’s economic output is either in the dollar or “dollar zone” – currencies pegged to the dollar.

China’s Currency VI What does the dollar’s supremacy mean for the average American? Relative stability of the dollar is what drives the global demand for dollar denominated assets Dollar’s significance enables inexpensive lending for Americans allows the government and U.S. companies to borrow easily

China’s Currency VII Financial Crisis a Turning Point One reason China is so determined is because of its desire for superpower status Another factor is its frustration during the 2008 international financial crisis Crisis demonstrated how vulnerable the rest of the world is to the U.S. economy and its currency Although the recession began in the U.S. it negatively impacted China In aftermath of the financial meltdown, Chinese officials believed the U.S. manipulated the global financial system and passed its economic pain on to the rest of the world

China’s Currency VIII U.S. actions included Depreciation of the dollar Three rounds of quantitative easing, and Allowing debt to balloon Also showed the danger of holding reserves of the dollar The recession of 2008 also hurt China’s export economy with demand for its goods and products taking a big hit in Europe and the U.S. The export-led economy that sustained growth fo so long in China is not viable in the longer term. By moving toward a consumer based economy the yuan has a better chance of becoming a major reserve currency China would not have to worry about the yuan appreciating

World’s Largest Economies