There has been much debate about the Chinese currency, its role in the global economy, and the liberalization of its exchange rate. China is an emerging economy that cannot but play a fundamental role in the international economy. China has been able to achieve an economic growth rate of 10 percent over the past decade. The high growth of the Chinese economy has contributed to the Chinese economy advancing to second place in the world in terms of GDP, after displacing Germany and Japan to become the second largest economy after the United States. Most studies agree that the Chinese economy will surpass its American counterpart within a decade, becoming the largest economy in the world by the first half of 2020. The global crisis has contributed to increasing the relative importance of the Chinese economy in the global economy, due to its growth incentives and huge reserves. The economic variables of the Chinese economy will be reflected in the value of the Chinese currency and the role it can play in the currency market and the management of the international economy (this was detailed in an article in Al-Eqtisadiah entitled The Future of the Saudi Riyal). During the past period, China relied on linking its currency to the US dollar with a fixed relationship, and before the global economic crisis and under American pressure, China partially severed the relationship between the dollar and the yuan by linking the yuan to a basket of currencies including the dollar with a high weight to achieve stable exchange rate between the dollar and the yuan. However, after the global crisis in 2008, the monetary authorities in China cancelled the link to the basket and returned once again to the link to the dollar.
The question that the honorable reader may ask is: Why is the Chinese monetary authorities so insistent on continuing the peg? China relies on commodity exports to achieve economic growth, and the US market is considered one of the most important markets for Chinese goods. By pegging the yuan to the dollar, China ensures the stability of the price of Chinese goods against American ones, which achieves a competitive position for Chinese goods in the US markets. This situation also applies to countries that are pegged to the dollar, in addition to the fact that the European market, in light of the economic pressures on the dollar to rise, represents a market for Chinese goods that is difficult to compete with. Therefore, China has been keen to continue the peg to the dollar despite US pressure and threats from the US Congress to impose sanctions on the Chinese economy. Since the growth of the Chinese economy depends on external factors other than internal growth, the monetary authorities in China will continue to peg the Chinese currency to the dollar despite the risks that the Chinese economy faces as a result of the peg, the most important of which is inflation. Any economy that fixes the value of its currency against another currency and achieves a surplus in the balance of payments is bound to suffer from inflationary effects, because the money supply in this economy becomes an internal variable that monetary authorities cannot control, and monetary tools to control monetary policy are limited, and the country is affected by the monetary policy of the state to which it is linked. Therefore, we note that inflation in China before the global economic crisis of 2008 exceeded 6 percent, and was expected to rise. The global economic crisis led to a decline in inflation during 2008 and 2009, while inflation rose again in 2010 to exceed 5 percent, which forced the Chinese Central Bank to take some measures to mitigate the severity of inflation, which is difficult for it to manage with a fixed exchange rate. The Chinese monetary authorities are in a difficult position between bearing the high costs of economic inflation or affecting economic growth by floating the currency. Therefore, I expect that in the coming period, China will shift to linking it to a basket of currencies to allow the gradual rise of the yuan and the continued competition of Chinese goods in global markets, as external demand and exports still represent the most important growth drivers for the Chinese economy, and domestic household demand is low compared to the potential of the Chinese economy. The global situation and the weakness of Western economies will make the Chinese currency an important currency in the global economy during this period.
As China continues to achieve high growth rates and domestic demand continues to rise, which has grown at an average rate of 6 percent annually over the past two decades, domestic demand will begin to constitute the most important source of growth for the Chinese economy. As domestic demand increases to become the most important growth catalyst for the Chinese economy, China will find that the wise policy that achieves the requirements of economic growth is to shift to a floating exchange rate policy. By shifting to a floating exchange rate policy, the monetary authorities in China will have sufficient flexibility to manage it in a manner that suits the Chinese economy. By floating the yuan and linking it directly to the basic variables of the Chinese economy, the yuan will begin to play a major role in the global economy, competing with the dollar and the euro in managing the global economy. It is expected that this period will coincide with the emergence of the Chinese economy as the largest economy in the world.