India, with a GDP equivalent to only about one-trillion US dollars (and how long will we use the US dollar as a global measure?) is not in the running. The PRC in 2007 already had a GDP of $3.2-trillion, and had, by that time done to India what India itself did in competitive terms to Pakistan over the past decade or so. The Indo-Pak strategic competition ended in India's economic triumph. The Indo-PRC strategic competition may well have also already been decided by the PRC's true "great leap forward": the one it took when it embraced capitalism and not the one avowed by Chairman Mao Zedong.
So can the PRC move toward creating the renminbi (Ren Min Bi: People's Currency, of which the yuan is the principal measure, such as the yen or dollar) as a global reserve currency?
Not yet. The PRC is hampered by a lack of transparent economic (and political) governance and a lack of market-determined tradability for its currency. And this in turn means that it has not yet, and cannot yet, gain global trust in its currency. That does not mean that it is not a tradable currency; it is, but with reservations.
The PRC, at present, cannot afford to move toward total economic or political transparency. It is a structure, arguably a mix between a federal and confederal and excessively centrist systems, which is in flux, much of it the flux of growth. This is inherently unstable, and the PRC leadership wisely will not tamper with the formula merely for the sake of providing the US with the economic satisfaction of lowering the exchange rate for the yuan or providing the world with the satisfaction of a new reserve trading currency.
The international community may be able to muster some credibility to resume greater reliance on the International Monetary Fund's Special Drawing Rights (SDRs), created in 1969 to reflect "baskets of currencies", but this mechanism of the Bretton Woods accords (which relied on fixed exchange-rate thinking and which, in any event, collapsed in 1973) remains clumsy. Still, SDRs continue to exist and may be the standby for a period. Some private institutions are also issuing trading certificates, but these would also take a lot of growth in backing and credibility to have any merit. And that leaves the old standby, gold, as a major standard of measure, albeit a difficult one. Physical trade in gold is not practicable for modern transaction scales; paper based on gold is, as yet, lacking in trust and a credible set of issuing authorities.
What this all means, in sum, is the prospect that major trade will gradually become more bilateral in nature, based on very real mutual trust in each other's currencies or goods. This will be a significant limiting factor in trade, and will make bilateral balances of greater interest than in the past when trade balances of a bilateral nature "washed out" in the great mixing bowl of the global banking system.
This situation, too, will severely impact investment in research and development of a global nature. It will, without doubt, also lead us back into an era of greater nationalism and national competition.
Source: Full article at: http://www.oilprice.com/article-the-search-for-a-reserve-currency-288.html
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