Friday, March 4, 2011

George Washington Blog via The Big Picture: Yuan Ascent to Reserve Status

Washington’s Blog strives to provide real-time, well-researched and actionable information.  George – the head writer at Washington’s Blog – is a busy professional and a former adjunct professor.

1 Chinese yuan = 0.152253 U.S. dollars
(4-3-2011 @5:00am EST)

For years, I’ve been writing about the long-term decline of the Dollar, and the rise of the Chinese Yuan … and it’s potential to become the world’s next reserve currency.
As I pointed out in 2007, many countries have started moving out of the Dollar as the basis for international trade settlements, including:
  • Venezuela and 12 other Latin American countries as well as Cuba
  • Many other countries
In 2008, I wrote:
Assistant Secretary of the Treasury, and the “Father of Reagonomics”, recently said: “The dollar’s reserve currency role is drawing to an end”. See also this articlethis articlethis reportthis essay,this roundup, and this one.
I also noted:
There are numerous hints that the dollar will not remain the world’s reserve currency for long:
  • Russia’s Putin is suggesting that Russia and China ditch the dollar and use their own currencies in trade deals
  • Thailand’s Deputy Prime Minister, Olarn Chaipravat, told Bloomberg News:
    “The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world.”
  • The Wall Street Journal writes that China is being asked to play America’s role of being at the center of the world financial system
In May 2009, I pointed out:
Nouriel Roubini says that the Yuan will eventually take over from the dollar as reserve currency:
What could replace [the dollar]? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.
China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.
At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.
Roubini provides advice which the American economic policy-makers ignore at their peril:
This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles…
Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar…
A couple of days later, I reported:
According to the Financial Times:
Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president…
In June 2009, I wrote:
George Soros said a couple of days ago that China’s global influence is set to grow faster than most people expect.
He might be right.
As the Telegraph writes today:
The head of China’s second-largest bank has said the United States government should start issuing bonds in yuan, rather than dollars, in the latest indication of the increasing importance of the Chinese currency.
The same month, I noted:
Yesterday, the BRIC countries said they might be each others’ bonds (and not just U.S. Treasury bonds). As Bloomberg writes:
Brazil, Russia, India and China are considering buying each other’s bonds and swapping currencies to lessen dependence on the U.S. dollar….
The BRIC countries have combined reserves of $2.8 trillion and are among the biggest holders of U.S. Treasuries.
In August 2009, I reported that Pimco was warning it’s clients to diversify out of dollars, as the dollar is losing it’s global reserve currency.
In October 2009, I noted:
The Wall Street Journal reported yesterday:
China and Russia are working on ways to eventually settle their trade with the Chinese yuan and Russian ruble, senior government officials from the two countries said Tuesday.
In January, it was reported that China had reached a similar arrangement with Brazil:
The Brazilian Central Bank announced it had reached an initial understanding with China for the gradual elimination of the US dollar in bilateral trade operations which in 2009 are estimated to reach 40 billion US dollars.
As I and many others have argued for years, everyone wants to get out of the dollar, but not all at once. Foreign central banks want to move out of dollars gradually so they are not left holding worthless paper.
But the process actually started a while back.


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