One of the most popular frameworks for international monetary policy\nsince the 1960s to the present is the impossible trinity or monetary\npolicy trilemma. This approach was popularised by International Monetary\nFund (IMF) economist Robert Mundell (1960) and Marcus Fleming (1963). It\nis popularly known as the Mundell-Fleming model.<\/p>\n
The impossible trinity states that a country cannot simultaneously\nachieve three objectives: maintaining exchange rate stability (fixed\nexchange rate), ensuring free capital mobility, and securing independent\nmonetary policy.<\/p>\n
A country must choose to achieve two out of the three objectives\nabove: first, maintaining exchange rate stability and implementing free\ncapital mobility but sacrificing monetary policy independence. The steps\ninvolve joining a common currency, such as the euro, or pegging the\ncurrency\u2019s exchange rate to the US dollar.<\/p>\n
Second, maintaining free capital mobility and independence of\nmonetary policy from external influences but sacrificing exchange rate\nstability. The option is to implement a flexible exchange rate regime\n(floating exchange rate regime).<\/p>\n
Third, maintaining exchange rate stability (fixed exchange rate\nregime) and ensuring independent monetary policy to guarantee tight\ncontrol over a country\u2019s national economy. This option sacrifices\ncapital freedom (capital controls).<\/p>\n
In line with the three options above, China\u2019s central bank, the\nPeople\u2019s Bank of China (PBOC), prefers the third option, namely\nmaintaining exchange rate stability and eliminating China\u2019s economy from\nexternal factors. At the same time, the PBOC restricts cross-border\ncapital flows.<\/p>\n
The third policy option is highly relevant since the 1997-1998 Asian\nfinancial crisis, marked by extreme depreciation of currency values and\ndeclines in stock price indices in several Asian countries. This was\ntriggered by hot money flows, namely short-term fund flows for\nspeculative purposes (speculative attack).<\/p>\n
The PBOC imposes restrictions on Chinese banks borrowing abroad and\nlimits the value of shares that foreign investors can purchase on the\nChinese stock market. This policy effectively limits hot money flows and\nreduces stock price fluctuations.<\/p>\n
This policy continues to the present day, hindering foreign investors\nfrom doing business with Chinese companies and limiting the\ninternational circulation of the Chinese yuan. The Chinese yuan is not\nyet fully and freely convertible to other currencies.<\/p>\n
In line with Eichengreen and Kawai, 2015, the PBOC differentiates\nmoney market interest rates in the domestic market, CNY (mainland), and\nthe offshore money market, CNH. This separation ensures the availability\nof the Chinese yuan for importers, but at the same time, the PBOC\ncontrols foreign exchange traffic between countries.<\/p>\n
The Chinese yuan is traded freely in the domestic money market but\nwith restrictions on transactions in the Chinese yuan money market\nabroad. The two Chinese yuan money markets also differ in terms of\ninterest rates. The difference can reach 10 percent. This directly\nincreases transaction costs.<\/p>\n
Fundamentally, as stated by economist Prasad, 2017, the PBOC has\nopened clearing centres to facilitate interbank transactions abroad and\nmoney markets outside China, but to date, the Chinese yuan is not\nsufficiently available in major world money markets, such as financial\ncentres in London and Geneva.<\/p>\n
As a result, the role of the Chinese yuan in international trade and\nfinancial transactions is limited. This is reflected in the index of\nChinese yuan usage in international transactions, which is only 2.5.\nMeanwhile, the US dollar\u2019s international usage index reaches 66 in\n2023.<\/p>\n
The index of Chinese yuan usage in international transactions does\nnot align with the size of China\u2019s contribution to the global economy,\nwhich is 17 percent. This is larger than the European Union\u2019s 15\npercent, with the euro\u2019s usage index at 23.<\/p>\n
Similarly, the US economy\u2019s contribution to the global economy\nreaches 25 percent, measured by real Gross Domestic Product (GDP). In\ncontrast, the US dollar\u2019s usage index is around 67.<\/p>\n
In terms of international trade, China\u2019s trade value has already\nsurpassed the US, reaching approximately 6.2 trillion US dollars in\n2024. Meanwhile, the US international trade value is only 5.3 trillion\nUS dollars in 2024.<\/p>\n
If observed in the early 2000s, China\u2019s international trade value was\nonly 447 billion US dollars. At the same time, the US international\ntrade value reached 2.0 trillion US dollars. China\u2019s international trade\nvalue surpassed the US since 2012.<\/p>\n
The Chinese yuan\u2019s international usage index of only 2.5 is due to\nthe low use of the Chinese yuan in payments for Chinese goods and\nservices trade. The use of the Chinese yuan in Chinese goods trade is\nonly 27 percent and 30 percent in services trade.<\/p>\n
The solution, to increase the influence of the Chinese yuan in\ninternational transactions, it is advisable to refer back to the\nMundell-Fleming economist; the best option for China\u2019s central bank, the\nPBOC, is to ensure free cross-border capital flows while maintaining\nindependent monetary policy by switching to a flexible exchange rate\nregime.<\/p>\n
In line with Eichengreen, 2023, the PBOC slightly sacrifices exchange\nrate stability without sacrificing capital freedom by eliminating\nrestrictions on Chinese yuan transactions with other currencies in the\noffshore market.<\/p>\n
Finally, for the national economy, in the short term, it will still\nface challenges from US dollar hegemony. However, in the medium term,\nthe share of the Chinese yuan will increase significantly, which will\nrequire<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/the-role-of-the-chinese-yuan-in-the-new-global-financial-order-1777611218", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }