Farcical discussion about CNY becoming reserve currency

There is currently a discussion going around in the media and especially on Twitter about the USD losing its status as reserve currency to the Chinese CNY. This is the most one-sidedly stupid discussion I’ve yet encountered on the internet. Usually, there more-or-less two sides to these kind of popular internet discussions, and one side doesn’t know what it’s talking about.

In this case, the latter side is completely dominant, both on the internet and in the media. People don’t appear to have even bothered to google what a reserve currency actually IS.

“A reserve currency is a foreign currency that is held in significant quantities by central banks other monetary authorities as part of their foreign exchange reserves.”

Most people go on about “pricing oil in CNY” etc but what really matters here is whether other countries (and foreign investors) hold large amounts of CNY-denominated bonds or other instruments. This is not the case. There also doesn’t appear to be a deep desire by foreign countries to take on such an exposure.

And then, in order to net provide CNY debt instruments to the rest of the world, China would have to run a large current account deficit. The last time China ran a current account deficit was in 1993. This current account surplus is structural, a consequence of the export-oriented Chinese economy. It would require fairly major structural changes to the Chinese economy, in particular a major increase in consumption and a decrease in export-reliance (and shrinkage of the export sector), to go to a current account deficit.

Also, the CNY isn’t readily exchangeable for other currencies because China has capital controls which it appears to be very fond of and which Xi Jinping will NEVER abolish.

There is currently some global increase in CNY reserve holdings because Russia is forced to avoid EUR and USD instruments, but just you wait how long that lasts after the war is resolved; there is certainly no chance for CNY reserves to surpass USD reserves under current structural conditions. It would require major changes in the structure of the Chinese economy and the thinking of its leadership to change that.


The idea that Western Central Banks (where most of the world money is) are going to put a majority of it in the Chinese economic system, subject to the whims of a single - notoriously unreliable and untested - political party strikes me as beyond ridiculous.

The US or other Western government may make some foolish decision here and there, even have some policies which are less that optimal, but at least there are voices to be heard about it, unlike a state which stifles dissent and actively prosecutes those who disagree.


There is another matter that does not fully strike home with westerns as it does with the Arabs and Indonesians. Remember the discussion about a week ago where Indonesia was also rethinking the USD?

China is unforgiveable to Muslims. Currently Chinese government policies towards their Muslim population are an impossible stain as they should be.

There is no work around for that. It makes Israel look like a small pimple in reality. Besides the Muslims and Jews share a lot which is why there is an argument.

Somehow there is no argument with China but that is not an act of faith. Quite the opposite.

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