China: Yuan poised to become reserve currency

China s yuan is destined to become a global reserve currency rivaling the dollar and the euro, as the nation s economic power increases the currency s allure, said Jim O Neill, chief economist at Goldman Sachs Group Inc.
The Chinese government will eventually allow the yuan, or renminbi, to trade freely on foreign-exchange markets, dropping the system under which it controls its value, O Neill wrote in an essay that formed part of a report published today for Chatham House, a London-based foreign affairs research organization.
As China moves in this direction, other large emerging economies will presumably gradually move in the same direction and the end result will be something approximating to today s Western monetary system, London-based O Neill wrote. Under such a system, the renminbi, dollar and euro would all form the linchpin of the world s currency markets.
China is likely to overtake Japan as the world s second- largest economy this year, said O Neill, who coined the term BRICs to describe Brazil, Russia, India and China in 2001. In the next decade, along with other large emerging, the size of China s economy will approach that of the U.S., he wrote.
The Chatham House report, which included a contribution from DeAnne Julius, a former member of the Bank of England s Monetary Policy Committee, was titled Beyond the Dollar: Rethinking the International Monetary System. Among its recommendations are a multicurrency reserve system and increased use of Special Drawing Rights as a supranational currency. SDRs are a unit of account, based on a basket of currencies, used in International Monetary Fund transactions.
The dollar-based monetary system is no longer adequate for a larger and more integrated world economy, it said. Prominent developing economies are increasingly demanding to be included in any multilateral dialogue that aims to shape the new economic order.