The American financial multinational, Morgan Stanley, predicts the future of the Yuan, stating that in 10 years the Chinese Yuan could become one of the strongest currencies in the world.
The competition between the most relevant currencies in the world became tense with the onset of the pandemic and the coronavirus crisis. Since, analysts never came to think that they would have to face such a scenario.
Now the future outlook changed in the face of a global inflection, where the economies of the power countries are in situations of critical economic recession.
In this way, the question that stands out is, which economy will recover from the others? For Morgan Stanley, the future of the yuan is clear.
Morgan Stanley’s prediction for the future of the Chinese Yuan
Morgan Stanley analysts issued a projection, where they considered that in the future the Chinese yuan will represent between 5% and 10% of the reserve assets of world currencies by 2030.
This builds on the scoop that increased foreign investment in Chinese markets could boost the use of the yuan. Pushing it to become the third largest reserve currency in the world.
Positioning it thus, only behind the US dollar and the euro, the analysts of the financial multinational asserted this Friday in an interview with CNBC.
Added to this, they assured in a closer prediction that the yuan will probably strengthen to 6.6 yuan against the US dollar. This by the end of 2021. Thanks to the rapid economic recovery that China has achieved, compared to the slow pace of the United States.
The Chinese government has been trying for some time to promote the international use of the yuan, also known as the renminbi (RMB). Achieving that analysts take this factor into account for future investments in the Chinese currency.
Well, the Chinese government has increased its efforts to allow more foreign financial institutions to enter the domestic market of the Asian giant.
It is important to keep in mind that foreign investors have also increasingly turned to the Chinese market. This in search of the potential for relatively higher yields than those of other regions. Giving bases so that the future of the yuan is as they predict.
The internationalization of the Chinese currency
In the past, China’s economic policy focused on preventing private and foreign financial institutions from entering the country. Since, the mission of the Asian giant was to boost its currency from the locality.
However, this vision has been changing in the last 9 months. Now, with these investments, more global assets will be held in yuan, managing to gain international traction and positive returns for the future of the yuan.
″ The 5% to 10% target is not unrealistic in light of the opening of the financial market in China. As an increasing proportion of China’s cross-border transactions denominated in RMB, they further this objective, ”said James Lord, international strategist at Morgan Stanley. “All of this suggests that global central banks will need to hold more RMB as part of their reserves.”
The challenges that the Yuan will have to face in the coming years
Despite the positive returns that these predictions promise, there is still an important element to consider so that they can be fulfilled, both in the short and long term. And that’s the political tensions between the United States and China.
Since, it is important to see how central banks and investment institutions could handle any political pressure around the allocation of their holdings due to this international dispute.
Finally, Morgan Stanley pointed out that there are several risks to its prediction that the yuan will grow in international prominence. Since, it is necessary that some factors are taken into account so that it is fulfilled.
These include: “… a slower than expected opening of Chinese financial markets to foreign investment, global market volatility, China’s economic risks, and a significant escalation in tensions between the United States and China.”
At the time of writing, the Chinese yuan was trading at 6.83 yuan against the dollar. Also, the yuan currently represents around 2% of the world’s foreign exchange reserve assets.
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