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The Chinese yuan won’t become a global reserve currency any time soon

The IMF just named the Chinese yuan to its basket of reserve currencies, a move hailed by many as a sign that the yuan is finally a major global currency, up there with the US dollar, euro, British pound and Japanese yen.
The IMF’s case for inclusion centers on China being the world’s third largest exporter, and, it says, the yuan being œfreely usable (even though the yuan is not fully convertible into other currencies). The IMF’s able to perform that magic trick because it defines this as for whether a currency is widely used for both global trade payments and currency exchange trade.

A closer look at the data reveals the yuan hasn’t truly become much more widely used than the Norwegian kronor. In fact, its recent rising popularity more likely reflects speculators one-way bet on the yuan’s appreciation against the dollar”an appeal that is now dimming fast. Those who argue that the yuan should be eligible as a global reserve currency usually point to the fact that the yuan is now the fifth-most used currency for international payments, according to SWIFT, a firm that tracks global transactions.

Hong Kong doesn’t exactly reflect overall international demand for the yuan. Though it has a separate legal and financial system, Hong Kong is also the primary financial channel through which mainland China interacts with the outside world. However, strip away Hong Kong’s influence, and the yuan claims only about 0.8% of international transactions” less than the Thai baht” notes Hung. Plus, SWIFTs don’t reflect a growing global use of the yuan so much as they do the appetite for speculation, says Logan Wright, an economist at Rhodium Group.

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