Can Chinese yuan be full-scale reserve currency? BRICS members face a dilemma

Recently, talks have become more frequent that the countries that are members of the newly created organizations such as BRICS or SCO, as well as countries that have expressed their interest in participating in these organizations, will soon begin to look for an alternative to the dollar as an international alternative reserve currency.

However, the BRICS members do not have a single opinion on group de-dollarization. All of them are interested in reducing their dependence on the US dollar, but not all of them want to be separated from the US-led global financial system.

Most BRICS members still hold large amounts of US dollar assets in their reserves, but a reserve currency needs to be stable and safe, a store of value and a medium of exchange, and widely accepted and trusted.

A reserve currency must be market-based, free-floating, and, most importantly, stable. That rules out cryptocurrencies that are prone to wild swings and live outside the regulatory system.

A good reason for the shared dominance of the dollar and the euro, and, to a lesser extent, the Japanese yen and the British pound is that they represent the world’s major economic centres and operate within the rule of law.

Meanwhile, other currencies do not yet qualify, as they are either too small (Switzerland), operate under totalitarian regimes (Russia and China), or allow for protectionism (India).

Today the BRICS countries face a dilemma: while they would prefer to have an alternative to the US dollar as their dominant currency, a depreciation of the dollar would reduce the value of their large amounts of dollar-denominated assets. Thus, they need to balance their desire for greater international influence and financial autonomy with the material costs of weakening the dominant currency position of the US dollar.

This balance is a critical issue not only for the BRICS but also has direct political implications for other countries and regional organizations that tend to have more independent monetary and economic policies.

However, let's return to the favourite among the candidates for the role of an alternative world currency - the yuan. And here is the main question arises: does the Peoples’ Republic of China itself, which has the second largest economy in the world, want this?

It turns out that he does not want to, and the main reason is that in China there is a fairly significant layer of super-rich people who have long had plans to move and transfer their assets in yuan abroad, or to be more precise, to the West. And the worst thing for the Chinese nouveau riche is the limits set by the Chinese government on the purchase of foreign currency.

Thus, Chinese millionaires and billionaires can spend only a fraction of their wealth abroad. Now imagine that the yuan becomes a freely convertible international currency.

The outflow of capital and people will occur at lightning speed and local assets in the form of real estate and local currency will depreciate in the blink of an eye. So, no country in the world will allow this to happen.

The share of the yuan in the world economy is just over 2 per cent. This also does not add optimism to the supporters of the yuan in the same Russia, which is striving to get rid of suffocating Western economic sanctions.

Thus, the prospects for the yuan to become a freely convertible international reserve currency are not great, because the dollar and the euro still feel more than confident, and the yuan itself, being relatively modest on international markets, does not strive for world domination, as mentioned above.