Revaluation of the Chinese yuan would also help.

(The yuan should be included as soon as China makes its currency convertible.)

Likewise, while the Chinese Yuan might be king in 50 years, China s moribund financial system will prevent it from being crowned anytime soon.

The explanation, I believe, lies largely in the August 11 devaluation of the renminbi, after a decade of appreciation. By moving away from the renminbi peg to the US dollar an undoubtedly risky move China demonstrated its willingness to allow market forces to establish the exchange rate in the long term.

As of 29 January 2014 the South African rand, United States dollar, Australian dollar, Indian rupee, Chinese yuan and Japanese yen are all legal tender in Zimbabwe.

The government is now seeking to decontrol domestic interest rates, create a more robust domestic bond market, and finally remove capital controls. However, with China s economy currently threatened by ongoing yuan appreciation, liberalizing the financial system could have perverse short run consequences.

Chinese policymakers should bear in mind that the value of the yuan is only one among many factors that affects the competitiveness of China s economy.

Although occasional bouts of nervousness in global financial markets cause the dollar to rise, I expect that the dollar will continue to fall relative to the euro, the Japanese yen, and even the Chinese yuan.

This is because official capital controls oblige exporters to deposit hard currencies with the People s Bank of China in exchange for freshly printed yuan (usually as bank deposits) or government debt.

The Yuan may well supplant the dollar in the second half of this century.

Of course, now that the renminbi has been accepted into the SDR basket, China must prove that it can manage dramatic currency depreciation effectively and continue to make progress toward internationalization. This will be no easy feat, especially at a time of slowing economic growth.

Chinese policymakers should bear in mind that the value of the yuan is only one among many factors that affects the competitiveness of China s economy. After all, a currency can appreciate while an economy is sluggish, or depreciate despite robust growth.

And, while the Chinese yuan has remained more or less unchanged relative to the US dollar in the past year, the dollar s sharp appreciation relative to the euro and other currencies caused the overall trade weighted value of the yuan to rise. This further depressed Chinese exports.

Le Défi Chinois

But the answers have been all over the map, with some finding that the yuan is not undervalued at all, while others argue that it should appreciate against the dollar by more than 30 .

Given this, the IMF could easily have rejected the renminbi s bid for inclusion in the SDR basket, as it did five years ago. But the IMF seemed eager (especially in the last few months) to bring China on board this time around.

Whereas Japan bashing included vol untary restraints on exports that threatened US heavy industries, where lobbies were concentrated and politically potent, recent Chinese exports have mainly been low to middle tech products of light industry.

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The Sino American Decade

The End of China s Surplus

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The Year of the China Model

China s decision to end its decade old policy of pegging the Yuan to the dollar has been greeted in Latin America with enthusiasm and optimism.

China s effort to hold down the value of the yuan vis à vis the dollar is thus a costly and pointless policy. By delaying a decision to float the yuan, the authorities are merely contributing to greater instability in the Chinese economy.

Consider what a decline of the dollar relative to the yuan would mean for the Chinese. If the Chinese now hold 1 trillion in their official portfolios, a 10 rise in the yuan dollar exchange rate would lower the yuan value of those holdings by 10 .

While hardly denting global trade imbalances, a small move would bring in a flood of foreign capital, overwhelming China s currency defenses and leading to chaos.

In the US China relationship, the RMB exchange rate has become a touchstone for broader anxieties about competition from China.

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China injected more than 46 billion into the China Development Bank and the China Everbright Bank through investments by its national SWF, the China Investment Corporation.

The first round of Yuan revaluation won t be over until the currency is up against the dollar by at least 10 , and probably more.

China s abrupt decision to raise the value of the renminbi (yuan) by 2.1 and to end its peg to the dollar comes after months of pressure from the US.

These social differences have little to do with the yuan dollar exchange rate, although that matters, too.

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Bringing the Chinese Consumer to Life