I was asked once, could the Chinese Yuan work for some third world country in Africa. I immediately thought about it, and listed off a reel of reasons, nowhere close to the list of official reasons that I have seen, why the currency would not work. However, I felt they were valid thought points that did not seem to be considered.
China has created an amalgamation of socialism and capitalism that would make Marx proud. I believe Marx stated communism was the evolution of the current capitalist system (Wallerstein, 1974: 387) (something I feel has often been missed in the drive to convert the world). However, China is large enough to be a self-contained market, and impose the socialist ideals within, while productive enough to demand capitalistically any shortfall from the global market. This is where the value of the current Yuan system comes into play.
As it stands, the Yuan is soft-pegged to the dollar, at an undervalued rate. The best way of describing this is that the Yuan that is shown to the outside world as cheaper than the Yuan that is used in China. A very simplistic way of looking at it would be the following (fake) example:
China sends out one Internal Yuan (IY), to buy coal worth 0.8IY on the global market. One Yuan is traded.
This coal powers a plant that produces (with other inputs; and China’s notorious cheap labour) a good that is worth 3IY.
This good is then sold on the market for 3 Yuan, valued at 2.4IY.
As long as this Chinese firm/government is ensuring that there is a profit on this good in terms of IY, there creates opportunity for growth (Boy, has there been growth).
This sounds ludicrous, and extremely un-capitalistic, until a very special point is raised. China predominantly imports raw materials. Raw materials are notorious for being cheap, and are being sourced famously from Africa (where China is doing something very interesting with their labour pool, a later blog). These raw materials are then transformed via the secondary sector into something fantastic, and sent out into the world at a much higher price.
Through this, the government has managed to create a socialist country with a capitalist face. This is entirely due to China’s productivity, fear of authority, and ability somehow to control the population absolutely (the new social credit system seemingly enforcing this point). China is enabled as a capitalist trade partner due to their willingness to trade and interact with the world in the more-capitalist-than-not global economy. What is equally important is that China is able to do this on a massive scale due to their cheap cost of labour, and extensive labour pool.
However, in the case of the mythical third-world country considering the acceptance of the yuan, the reverse interaction would occur. They would pay more for imports, as does China, except unlike China, they are importing the very finished goods that are more expensive, while exporting raw materials traditionally. The export of Yuan-priced raw materials discounts these goods on the global market to all but others who use the Yuan, and similarly increase the price of imports from China, as the ‘discount’ placed would no longer apply.
This sounds like a great arrangement for the People’s Republic of China! The trade partner, however, would suffer from the negative effects of adopting the Yuan, the increased cost of importing from China, as well as the discount on the currency in the global market, hurting their ability to trade with anyone else.
I hope I have made this thought more accessible than talking the very real and relevant central bank concerns. Leave any thoughts or requests below.
Reference: Wallerstein, I, 1974. The Rise and Future Demise of the World Capitalist System: Concepts for Comparative Analysis, Comparative Studies in Society and History, Vol 16, Issue 4, Pages 387 – 415
Images Free Use from Pixabay.
I have many thoughts and they are based on experience, my knowledge of economics, and discussions I have with my friends and peers, who are very educated people with a lot of experience in their fields. I will not say all the world problems are solved over a bottle of brandy, but at the same time, I definitely think some interesting thoughts arise, sadly without Harvard Referencing. I do not claim these as original, unique ideas; however, I do claim them due to research over the years in politics, philosophy and economics, brewing in the cauldron of my thoughts. As such, they will not be referenced, as they have been distilled through informal discussions, life experience, and my own personal understanding, unless they are referring specifically to any recent news piece or article.