The rise of China to become the second largest global economy has allowed it to execute foreign trade and investments using the yuan. This helps reduce transaction costs for Chinese importers and exporters and reduces volatility for commodities. China would like to see a basket of possible reserves currencies such as the US dollar, yuan and euro. Unfortunately, none of them alternatives are realistic. The euro is facing a crisis and possible breakup. For the yuan to graduate to become a reserve currency, China would have to increase the limits on capital flows into its markets - allowing securities, currency exchange rates and interest rates to float. This would degrade the Politburo's control of the country's economic policy.
John Williamson, a senior fellow at the Peterson Institute for International Economics in Washington, identified two advantages of the dollar as reserve currency: China's large holdings of US assets is used to maintain the yuan to dollar peg but encumbers their policies and the US can enforce financial sanctions. Other than those items, the US has no freedom to manage its exchange rate. He predicts that the US dollar will remain the currency for the next 25 years.
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