YUAN CREATING GLOBAL INBALANCES

CAN YUAN BE THE THIRD GLOBAL TRADING CURRENCY?

As Yuan is an inflexible currency. In recent years China has experienced an indefinite growth in its surplus of current account more than its GDP. As Yuan is devaluated which makes its exports cheaper and due to low cost China has become manufacturing hub of various top most companies, in this paper we will bring facts and figures about its exchange rate intervention limited appreciation of the currency which has led China to build up of external reserves to more than 3 trillion. In the context of Rapid development, recognizing that external imbalances reflect diverging national production and expenditure growth with in China and its trading partners as Yuan exchange rate undervaluation against major currencies is central to any explanation of global imbalances. Due to currency misalignment, Chinas industrialized trading partners most notably the US and EU have experienced high current account deficit with China, lower output , lower saving and higher investment than otherwise. Further appreciation of Chinas exchange rate would simultaneously reduce trade surplus and the deficit of trading partners. Even though surpluses has fallen from 10% of GDP in 2007 to 2.8% in 2011, but IMF has forecasted surplus of 7.2% of GDP by 2016. We would be studying the effects of Yuan's appreciation, depreciation on the global trade. Should the Yuan be set as a global currency to negate the effects on the global trade due to its appreciation or depreciation?