China Joins Elite Currency Club

WORLD

The International Monetary Fund is adding the Chinese yuan as a reserve currency, marking a milestone in the country’s ascendancy as a global economic power. (Wall Street Journal)

Use today’s MapMaker Interactive map to navigate the world’s most elite money club—the five reserve currencies. Then, test your knowledge with our easy five-question quiz.

Teachers, scroll down for a quick list of key resources, including today’s MapMaker Interactive map and five-question quiz.

The currency code for yuan renminbi is CNY, and the currency symbol is ¥. One yuan is worth about 16 U.S. cents. (That’s young Mao on the 100 yuan bill, of course.) Photograph courtesy Pixabay. Public domain.

The currency code for yuan is CNY, and the currency symbol is ¥. One yuan is worth about 16 U.S. cents. (That’s young Mao on the 100 yuan bill, of course.)
Photograph courtesy Pixabay. Public domain.

Discussion Ideas

  • The terrific Wall Street Journal article notes that China’s currency, the yuan, has been elevated to “reserve currency” status. A similar article from the New York Times (and International Monetary Fund Managing Director Christine Lagarde) identify the currency as the renminbi. Who is right?
    • Both, of course. The yuan is China’s unit of currency, like the dollar is in the United States. The renminbi (meaning “the people’s currency”) is the name of the currency itself. The yuan is a denomination of the renminbi.
      • According to the BBC, “an analogy can be drawn with ‘pound sterling’ (the official name of the British currency) and ‘pound’—a denomination of the pound sterling. Something may cost £1 or £10. It would not be correct to say that it cost 10 sterling.”

 

  • OK, so what is a reserve currency?
    • According to Investopedia, a reserve currency is “currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate. A large percentage of commodities, such as gold and oil, are usually priced in the reserve currency, causing countries to hold this currency to pay for these goods. Holding currency reserves, therefore, minimizes exchange rate risk, as the purchasing nation will not have to exchange their currency for the reserve currency in order to make the purchase.”

 

Where are the world’s most elite currencies? Does status as a reserve currency reflect a nation’s economic strength and stability? Use today’s MapMaker Interactive to find out.

Where are the world’s most elite currencies? Does status as a reserve currency reflect a nation’s economic strength and stability? Use today’s MapMaker Interactive to find out.

  • What are the world’s other reserve currencies? Consult today’s MapMaker Interactive map for some help!
    • It’s truly tiny, elite club—just four members besides the yuan.
      • The club is dominated by the mighty U.S. dollar, which accounts for about 65% of the world’s foreign currency reserves.
      • The euro, used in the 19 countries of the Eurozone, is the second-most commonly held reserve currency, accounting for about 21% of the world’s foreign currency reserves.
      • The British pound accounts for about 4% of the world’s foreign currency reserves.
      • The Japanese yen accounts for just under 4% of the world’s foreign currency reserves.
      • Other strong currencies, such as the Canadian dollar, Australian dollar, and Swiss franc, are not part of the club but account for about 5% of the world’s foreign currency reserves.

 

  • What impact will the elevation of the yuan have on the international currency market?
    • Not much. According to the venerable WSJ, the move is more symbolic than practical at this early stage.
      • “For the Chinese, it is a matter of prestige, a plank in Beijing’s strategy to elevate the country’s economic role in the global economy as it challenges U.S. political and economic dominance around the world.
        “Still . . . the yuan’s new status could lead to a 1% annual shift in reserves into yuan-denominated assets over the next five years, totaling about $1 trillion.”

 

TEACHERS’ TOOLKIT

Wall Street Journal: IMF Lifts Chinese Yuan to Elite Lending-Reserve Currency Status

Nat Geo: Reserve Currency Quiz

Nat Geo: Where are the world’s reserve currencies? map

BBC: Why China’s currency has two names

Investopedia: Definition of ‘Reserve Currency’

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