Trade Currency and Reserve Currency- Group 6- EBBA6B

TRADE CURRENCY AND RESERVE CURRENCY:THE INTERNATIONLIZATION OFF THE YUAN

GROUP 6:1. Vũ Khánh Linh2. Nguyễn Hùng Long3. Trần Thị Hương Quỳnh4. Nguyễn Tuấn Hùng

OUTLINE

I. Trade currency, reserve currency and internationalization.

II. Why does China want to internationlize the Yuan?

III. How to meet up with the criteria of the SDR basket inclusion?

IV. What are the impacts of the yuan on Vietnam?

V. Should the Yuan become the world new reserve currency?

I, WHAT DO TRADE CURRENCY, RESERVE CURRENCY AND INTERNATIONLIZATION MEAN?

Reserve Currency Trade Currency

Similarities

• Generally come from countries with strong

economic and political situation

• Widely accepted around the world as a

form of payment for goods and services

• 5 trade currencies in SDR Basket: U.S. dollar

(USD), European Euro (EU), Japanese yen

(JPY), British pound (GBP) and Chinese

Yuan (CNY)

Reserve Currency Trade Currency

Differences

• Held by central banks, major financial institutions as a means to pay off international debt

• Used to price large percentage of commodities: oil, gas,…

• World’s reserve currency: US Dollar

US Dollar

• is the worldforeign reserve currency

• used in 70% of international trade transactions

December 1st,2015

IMF added Chinese Yuan into the SDR basket.

October 1st,2016

Chinese Yuan’s inclusion in the SDR basket takes effect.

Internationalization

To make something be come international

II, WHY DOES CHINA WANT TO INTERNATIONALIZE THE YUAN ?

1. Gain Global Prestige

The SDR status is the recognition of China’s rise

2. Set Up A Multi-Polar World

A reduction in regulations on capital flows accompanies with the Yuan being in the SDR will help to internationalize the yuan.

=> Create a more open capital market to meet up with domestic firms’ financing needs and cut their borrowing costs.

3.Set Up A Multi-Polar World: Getting closer to set up a “multi-polar” world with the Yuan’s reserve currency status.

4. Become The Price Setter: Increasing use of the Yuan in international trades along with its reserve currency status help to make Yuan a pricing currency.

5. Raise The Yuan Demand

An inclusion in the SDR Basket and the automatic acknowledgment of ‘Official Reserve Currency’ status will attract people to invest in the Yuan

III, HOW DID THEY GET THERE ?

“The country must be a major exporter, and the currency must be freely usable”

Since 2009

1, China’s one of world's largest exporters

2, Increasing international use and trading :

•2009, China bought $50 billion IMF Bonds, agreed to lend the Yuan the central banks of South Korea, Malaysia, Indonesia and Belarus

• Decided to set up 12 more Free Trade Zones after the Shanghai FTZ in 2013

- December 2015, China initiated the Asian Infrastructure and Investment Bank

- Open offshore Yuancenters

IV, WHAT ARE THE IMPACTS OF THE YUAN ON VIETNAM?

Import and Export:

Negative effect

Viet Nam will have to import materials from China at higher costs

Positive effect

The higher price of exports from China, the less competitiveness it will be

• Influence on reserving foreign exchange: An encouraging strike for Vietnam central bank to add more Yuan in the reserve currency basket.

• Central banks and international investors will be buying more government bonds and other properties on papers which is denominated by Yuan

V, SHOULD THE YUAN BECOME THE WORLD NEW RESERVE CURRENCY?

1. US and Europebrushed off the idea

2. Seven-tenths of the international yuan transactions are done in Hong Kong

3. The fluctuation in the yuan use

4.It is not clear that the Chinese government will be willing to suffer the unpleasant side effects that come with being a global reserve currency or not

5. China fiscal practices are much less transparent that those in the West

6. China desires a lower valuation of its currency to promote export