How many yuan is a Canadian dollar worth? Soon it may be useful to know that it is, at the moment, around five.
What happened: Xi Jinping called for the yuan to become a global reserve currency, playing a role similar to the U.S. dollar in the global financial system.
Xi has previously said that China needs to build a “strong currency” that can be used for international transactions, and these comments were the clearest articulation yet of that goal.
Right now, the Chinese yuan accounts for less than 2% of foreign exchange reserves held by countries around the world. 57% of reserves are held in U.S. dollars, 20.3% in euros, and 5.8% in Japanese yen.
Why it matters: Having the world use your currency to buy and sell across borders is a pretty sweet deal for the country that prints it. For the U.S., the dominance of the dollar means that other countries and corporations need it in order to trade.
That allows the U.S. to finance its debt at a cheaper rate than other countries, because there’s constant global demand for dollars.
It also gives the U.S. the power to impose devastating financial sanctions on its rivals and enemies, cutting them off from much of the global economic system.
Yes, but: For the yuan to supplant the dollar’s reserve currency status, China would need to give up its strict controls on money moving out of the country, open financial markets, and accept currency appreciation that would hurt its exports. In other words, it would have to make its economy work more like America’s, which may be a bridge too far for Xi.