In the past few months, we can see the news that Chinese Yuan(CNY) keeps depreciating in the FX market. This brings a big impact to China’s financial market and capital market. In some sense, we can assume this is a signal that China is pushing Chinese Yuan(CNY) to be an international currency reserve. At the same time, this will reduce the power of U.S. dollar in the world economy. Many countries’ financial markets have been priced in USD for decades. The economy of U.S. is now at the turning point of recovery. There are still many uncertainties about the future trend of US dollar. Besides, more and more attention has been devoted to China’s future rapid growth in the next two decades.
Although Chinese Yuan (CNY) keeps depreciating, China’s great potentials on future economy shows foreign investors and governments a great deal of confidence that Chinese Yuan(CNY) will appreciate in the future for sure. Hence, this will be a better choice for western countries to purchase more CNY as currency reserves.
After Chinese Yuan (CNY) becomes an international currency, Chinese investor will have chance to buy stocks in developed countries’s stock markets. Then, there is a big question coming up. Who is going to buy those stocks with P/E ratio of more than 100 times in China? If China gives more freedom on floating exchange rate regime, Chinese investors’ allocation will be changed from mainly Chinese stocks to United States’ real estate investments and stocks. Then, there will cause big challenges to China’s financial markets and financial innovations.
I am reading your posts and your posts make me get interested in the finance world. :)