The IMF is considering adding the Yuan to the group of reserve currencies. That would put it alongside the U.S. Dollar, the Japanese Yen, the English Pound, and the Euro in terms of “officially perceived” stash-your-value-here viability. As far as actual criteria for inclusion go, the Canadian Dollar, Australian Dollar, and very likely the Russian Ruble are probably actually closer to being genuine reserve currency material than the Chinese Yuan.
China is much closer to a total financial collapse and internal civil disruption* than recovery and stability in its current form. Long-term, of course, China will still be right where it is and the people there will still be Chinese (but there will eventually be far fewer of them, at least for a few generations). A Chinese collapse right now would be a major disaster for everyone. The commodity markets are depressed more than they have been for several decades (in relative terms, actually, I’m not sure that we actually have a post-WWII precedent for what is happening), energy is cheap, credit is massively overleveraged, and yet people aren’t buying enough stuff to keep the wheels spinning.
What does that have to do with the Yuan becoming a reserve currency? It does three things:
- Gives China access to an external aggregate value device to prop up the yuan if necessary (links their economy to everyone else’s by failure, similar to the way subsidies can do this within a national economy). This effect is actually more a hoped-for psychological effect on the market than a tangible superpower China is being granted by the rays of a yellow sun.
- Makes the Yuan a necessary holding for anyone trying to carry a balanced basket of reserve currencies (temporarily spikes demand for the Yuan).
- Promotes an impression of stability in the Yuan (well-founded or not).
Why would the West agree to this? (And I say “the West” because, let’s face it, Washington and London are pretty much the ones who will be deciding.) Because if China were to fail right now it would be a severe annoyance for the U.S. and a complete disaster for Europe and Russia. Nobody really knows what the fallout of that would be, but it wouldn’t be pretty.
The Yuan will be made a reserve currency, whether it makes sense or not, and whether it actually fits in the reserve currency club by the standards and rules the IMF itself has laid out. These are scary times and nobody has any good levers to pull to “fix the economy” so national governments and central banks are pulling at straws because there is simply nothing left to try. All the control rods have been yanked out and tossed already, or shoved in and locked tightly; all the red buttons have been mashed; all the hyperbolic rhetorical devices have been so over-used at this point that the only thing that might actually influence market participants is a frank exposition about the truth rather than more “we’ll do whatever it takes!” and other gung-ho, “it’ll work this time” and “this is the lastest of the last rounds of QE, and this time it will really be the most effectivest of effective measures… I promise!” blather.
[* China is due for two painful corrections which will likely occur together, as they are linked. The first is a political correction; China’s geography does not lend itself to a central command economy. The second is a property-claims correction; when basic goods cannot be had at any price it means the entire system is so out of whack due to government interventions that only a hard reset can fix things. This will likely take the form of a civil war, but who knows. It could be gradual decline toward state failure followed by a logical and non-violent nation-wide roundtable discussion, or even a bloodless revolution coupled with a voluntary capitulation of material holdings by the power elites. But seriously, this has never happened in history and there is no reason to expect China’s inevitable transitions to occur independently of one another, or for either to be non-violent.]