Comment by codedokode

China maintains a soft peg on the yuan in order to keep their industrial output cheap.

Part of the way they do this is with heavy currency controls. Those currency controls make it difficult to do international trade with the yuan.

But worse from Chinas perspective you can’t maintain a peg if your currency is used to trade goods, particularly fungible commodities because the commodity itself becomes the medium of exchange and derails the currency peg.

That would be disastrous for their exporters and their economy is not in a position to sustain that currently.

It's likely not beneficial to them, for a couple reasons.

First of all, they can print Yuan. They want people to buy those pieces of paper for something of value. It doesn't do much good to have people send all that paper back in exchange for phones and tablets and stuff. Then they would've just got back some paper they printed in exchange for something that took time and resources to make.

No, they need something physical or at least valuable for that paper. Such as local labor. Then their own population can spend the paper internally, because it's in theory exchangeable for something external. When China buys stuff from the US, it spends dollars. Which it buys from the US not with Yuan, but with computer parts. It pays its own people Yuan to make the computer parts... but the Yuan is only valuable because the government holds dollars and euros to buy stuff that their citizens can then buy for Yuan.

This is why Trump's overall foreign policy and particulatly his tariffs scheme risks destroying America. If at some point enough countries decide that the USD is too unreliable, they may look for the next best paper to trade. That would be catastrophic for the US which may deserve it in any case, but it would be truly terrible if the alternative were a currency privately owned and manipulated by the leaders of a dictatorship. Perhaps the world isn't stupid enough to do that, but the size of China's economy compared to anything else would make it tempting.

I'll stipulate right now that if China were a democracy with civil rights and a fair legal system, I would have no problem with it taking over world trade from the US. But currently it's a repressive authoritarian state.

> I wonder can China use this to make Yuan a new world currency

I suspect a strong precondition for this is to switch world oil trade away from the dollar, and that is currently enforced by a combination of military power and "winner takes all" network effect mechanics of the trade.

China has 2 currencies - Yuan for foreign trade and RMB for internal exchange

I can definitely imagine Yuan being used more