Yuan becomes one of the three major currencies

In July 1944, when the Second World War was nearing the end, the representatives of 44 members of the Allied Powers including the U.S. and the U.K. gathered in Bretton Woods in the state of New Hampshire to set a new post-war international monetary order. The meeting aimed at introducing a gold exchange standard system where the key currency of U.S. dollar was pegged to gold in place of the gold standard whose days were being numbered. While the Bretton Woods system came to an end due to the Nixon Shock in August 1971, the U.S. stopped the exchange between the dollar and gold, the dollar has maintained its status as the largest key currency of the world.

Before the Nixon Shock, the international monetary order had faced a crisis due to the surging deficit of the U.S.’ balance of international payments and Japan’s economic growth during the late 1960s. Global policy makers encountered with a dilemma where the production of gold reached its limits in the face of swelling demand for liquidity in international transactions and the injection of dollars led to the expansion of the U.S. deficit, which in turn chipped away at the credibility of the greenback. In 1969, the International Monetary Fund devised a quick measure called the Special Drawing Rights (SDR) to precisely untangle such a predicament.

When their international balance of payments worsens dramatically, the member states of the IMF are allowed to exercise their SDRs within a certain limit without the condition of collateral. Even though the SDRs are intangible, the value of SDRs are decided based on the standard basket system, a system used to find the weighted average of major international currencies. The currencies including in the SDK Basket are reviewed every five years, and the basket is currently comprised of the dollar, euro, pound and yen.

It appears that China’s ambitious agenda to make the yuan a counterweight to the U.S. dollar by 2025 is almost reaching the goal. On Oct. 30, the IMF executive committee concluded the policy to include the Chinese yuan in the SDR currency mix. The decision will increase the international stature of the Chinese currency and lead to the ascendancy of not only the currency itself but also the Chinese finance to global preeminence. Of course, there remain a host of barriers and hurdles for the yuan to overthrow of the hegemony of the U.S. dollar and supplant its status as singular key currency of the world.

It has become clear, however, that the recent shift in the status of the yuan will have a grave ripple effect on the global economic and financial order, given that the currency has become one of the five major currencies and is likely to emerge as one of the three currencies along with the dollar and euro. It is time for Korea to take measures, such as the operation of foreign reserves and diversification the currencies of international settlements.