1. NS4960 Spring Term 2017 National Security and the Chinese Yuan

2. 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

3. Reserve Currencies

4. 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

5. 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

6. China’s Currency IV

7. 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.

8. 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

9. 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

10. 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

11. World’s Largest Economies