China Yuan Becoming Reserve Currency Essay

In recent years, China has maintained that it’s â€Å"special† economy is pursuing a â€Å"market economy, but with Chinese characteristics†. Some of these characteristics include encouraging more of an international use of the currency, while being famous for their inflexibility with exchange rates, and not fully opening up the economy to the free flow of capital. However, the Yuan’s acceptance as a reserve currency will be based on China’s economic size, macroeconomic policies, flexible exchange rates, financial market development, and finally having an open capital account. It seems that with time, it is inevitable that China’s Yuan will one day become a global reserve currency. Depending on the development of these five criteria, China’s currency may become a global reserve currency sooner than predicted. China’s Economic Size The Chinese economy is now the second largest economy in the world, and estimated to have 10 – 15 percent of the world GDP. Further, in 2011 China accounted for almost 25 percent of the world’s GDP growth (Briscoe, 2012). Despite this, GDP and economic size are not the main determinants of a country’s reserve currency status. If we remember US history, we will note that the United States surpassed the United Kingdom in terms of GDP in 1870, but still did not become a reserve currency until 1944 (Prasad, 2012). Thus, economic size in not the most important factor in becoming eligible for world currency status. Macroeconomic Policies The continued role of the government in the banking system is a limiting factor when trying to encourage a more open capital account. However, the government maintains that keeping a tight control over their currency prevents economic crisis.