The Yuan as the World's Reserve Currency
With the recent revolutionary fervor in the MENA region, one can only wonder if and when the tidal wave will sweep further to the East. In light of recent increases in Chinese censorship it is as good a time as any to muse about the validity of the Yuan as the world’s reserve currency.
We have been here before in recent times, as doomsday preachers espoused the increasing influence of China in global markets and as the U.S’s personal debt holder. But how strong is the Yuan fundamentally? Can an economically survive long term while artificially held in place? Does a machinery which functions on nothing but production and export really have a bright future?
The five necessary requirements for a reserve currency certainly bring the Yuan’s validity in this role, further into question. Here is what it takes to be the world’s reserve currency.
The 5 Haves…
1) Deep, liquid, open bond markets
2) Floating currency
3) Property rights, civil rights
4) Political stability
5) Political freedom
Which China Has Not
I would really like to hear debate on some of the five points. For instance, does China’s iron fisted #4 lead to the lack of a need for #5? With Tiananmen almost a quarter century in the rear view, if nothing else, the CPC has proven the ability to keep order. By hook or by crook. #3 is an interesting point, China’s society certainly is not free, but with deep enough pockets property rights are beyond feasible. Hmmm…this one seems familiar. Can’t help much on #1 and #2, anybody have thoughts?
Overall, I have not been nor will I be a China bull any time soon. I think they are just big enough to fail, however, that does not absolve the USD. With recent hiccups in the Eurozone and the refusal of our own sinister central bank to let the Dollar be worth its actual value…maybe that vaunted currency basket world is closer than any of us realize.
Any thoughts?
Comments
Midas aren't you going to
Midas aren't you going to show up for today's WSO happy hour? I assume you live in NYC.
As long as the US military
As long as the US military specifically the Navy is the most dominant in the world, the USD will remain the world's reserve currency....cut Medicare, Medicade, SS, not Defense spending.
System will not change
System will not change substantially for at least another decade, barring a blowout.
Include also the following assumptions to the list:
6. Power projection: ability to ENFORCE contracts / trade agreements. USA has ample supply.
7. Cultural Hegemony: willingness of other cultures to participate in / accomodate. US culture is ENORMOUSLY popular overseas and widely emulated
8. Multifaceted home economy: various sectors of the economy are fully and uniformly monetized. Land, labor, intellectual property, etc...
9. Consistent, coherent, and predictable, patterns of behavior: US behavior is VERY consistent across political administrations, especially with regards to foreign policy.
10. Sufficiently sophisticated + Durable + accountable system: [pushing several points into one, I don't want a long list] Chinese and apparently EU financial systems are apparently either unstable, unaccountable, or not well enough developed to stand alone, or some combination of all of the above: LET ALONE well developed enough to be the centerpiece of the global economy.
I invite others to add to this list. China, the EU, and other countries have advantages in a few points, but overall can not hope to compete with the USA for decades to come.
YOU JUST GOT TROLLED
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@acctFlingin Damn right In
@acctFlingin Damn right
In War the curreny is ammuntion and warfare material, so the USA is prepared well...
Maybe the establishment of a world currency, guided and led by BIS,IMF and WTO is a point to discuss.
Keynes points:
*Currency would not suffer from inflation, which can possibly have disastrous effects for economies.
*International Business and Finance tends to be more effcient, Investors have easy access to capital markets
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The problem with a world
The problem with a world currency is the lack of an adjustment mechanism with regards to trade. Some countries will get smoked, others will have an unfair advantage. Just look at the euro right now. Germany is laughing straight to the bank while Greece is being ground up into a fine powder.
Midas's first two conditions are absolutely imperative to the yuan becoming a reserve currency and progress on those fronts is going mighty slow.
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The Yuan doesn't have the
The Yuan doesn't have the practical convertibility to be the world's primary reserve currency. The closest we'll ever get to that is the institution of the World Bank's SDR, which is already held and circulated for trade/shipping settlements. I'd concede that the Yuan might well eventually hold a bigger portion of the SDR basket if China remains on its current macro path though.
"Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to become the means by which men deal with one another, then men become the tools of other men. Blood, whips and guns or dollars."
It's going to take several
It's going to take several years for the yuan to overtake the Euro let alone the USD in terms of a feasible reserve currency. IMO #2 is the main roadblock. #1 will happen naturally as China's system develops while I don't think 3-5 are going to be that imperative in China's case.
As far as the need for the currency to float, China is moving at snail speed to acquiesce to this. China has begun currency swap agreements with other countries so now at least the yuan is held internationally. China also now has allowed Hong Kong to open a new gold contract denominated in the mainlands currency. There is also a Bank of China in San Fran where Americans may open bank accounts (I think there is one in NYC as well).
Still unless some major shit hits the fan in the U.S. or Bernanke and congress don't get their shit together, I don't think that the Yuan will completely replace the USD.
Making money is art and working is art and good business is the best art - Andy Warhol
In terms of market access and
In terms of market access and free enterprise, the yuan will never turn in a world currency, don´t forget the PR China uses the yuan to regulate their own finance markets, they have no interest in outside-china activies.
So keep in mind what economists were saying on strong regulated closed finance systems.
My scenario foresees that someday (2030+) Russia will join the EU (Better Client Access for Selling Commodities !) and accept the Euro as currency. This a worst-case scenario for US politicians. That will have a devasting impact on US and will end in the downfall of the dollar and the uprise of the Euro.
Remember year 2000, Saddam Hussein announced that he would not accept longer Petro-Dollar....
Maybe there some documents in Oval Office that will start so:
The devaluation of the dollar represents a clear and present danger to the national security of the united states,
XXXXX XXX XXXXXXX XXXXXXX XXX XXX XXXXX XXXXXXXXXXXX xXX.
The President of the United States advises the National Security Council, DoD, Homeland Security....
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What do you guys think of
What do you guys think of ths?
http://www.zerohedge.com/article/how-china-just-im...
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-Dwight Schrute
Hamilton wrote: What do you
What do you guys think of ths?
http://www.zerohedge.com/article/how-china-just-implemented-stealth-bailout-bigger-one-and-half-tarps
Holy shit.....
YOU JUST GOT TROLLED
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Heard about that a while ago,
Heard about that a while ago, not all that unexpected. My money's on the next financial crisis starting in China.
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Tyler Durden He´s doing a lot
Tyler Durden
He´s doing a lot of conspiracy theory, not my taste...
But I´m sure the next bigger financial crisis will definitely start in Asia. Not in China, but maybe in Japan.
China´s financial system is designed to regulate itself or it´s possible for the communists to prevent bigger damages. Also China has more than $2.8 Trillion in FX Reserves and possibly $10-15 Trillion cash overall.
I would state that China is in a prestigious position, it can set up a financial crisis(market maker as Creditor) politically intended.
Think about !
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RexAlpha wrote: In terms of
In terms of market access and free enterprise, the yuan will never turn in a world currency, don´t forget the PR China uses the yuan to regulate their own finance markets, they have no interest in outside-china activies.
So keep in mind what economists were saying on strong regulated closed finance systems.
My scenario foresees that someday (2030+) Russia will join the EU (Better Client Access for Selling Commodities !) and accept the Euro as currency. This a worst-case scenario for US politicians. That will have a devasting impact on US and will end in the downfall of the dollar and the uprise of the Euro.
Remember year 2000, Saddam Hussein announced that he would not accept longer Petro-Dollar....
Maybe there some documents in Oval Office that will start so:
The devaluation of the dollar represents a clear and present danger to the national security of the united states,
XXXXX XXX XXXXXXX XXXXXXX XXX XXX XXXXX XXXXXXXXXXXX xXX.
The President of the United States advises the National Security Council, DoD, Homeland Security....
Uh by 2030 the EURO will cease to exist. It is a horribly flawed currency. It may only exist in Germany and France. It was extremely smart of Britain and the Nordic countries to not adopt the EURO.
It is toast.
The one who does not fall, does not stand up
You are going to see many
You are going to see many many more financial crises coming up with all the keynesian economic debt problems around the world.
Japan will collapse and although people have been betting agaisnt japan since 1991 this time the demographics are on their side.
China has a huge property bubble where they have built ghost cities but supposedly that is in anticipation of 600 M chinese moving to the city in the next 20 years so. The difference when these ghost cities and crap exurbs in the US is that the ghost cities in china are being meticulously maintaned and taken care of. So which side of the knife do you want to catch?
It will be interesting to see what happens to the EURO when Greece, Spain, Portugal, Ireland do not just declare a technical default but actually do collapse under their keynesian economic print to the end regime.
As i said above I fully expect it to cease to exist. All those countries should go back to their own currencies it will suit them better.
The US is also not safe and the problems are mounting here under our own keynesian end game. Hyperinflationary debt default.
The one who does not fall, does not stand up
RexAlpha wrote: Tyler
Tyler Durden
He´s doing a lot of conspiracy theory, not my taste...
But I´m sure the next bigger financial crisis will definitely start in Asia. Not in China, but maybe in Japan.
China´s financial system is designed to regulate itself or it´s possible for the communists to prevent bigger damages. Also China has more than $2.8 Trillion in FX Reserves and possibly $10-15 Trillion cash overall.
I would state that China is in a prestigious position, it can set up a financial crisis(market maker as Creditor) politically intended.
Think about !
And indeed, as crisis was, is and will always be the best instrument to bring forth policy changes which are unthinkable under normal times. For the big players, say, multinational corporations for example, this is the best time to buy out their smaller opponents as only they have access to unlimited financial power.
As for consipiracies, actually many of them are quite "open".
RexAlpha wrote: My scenario
Making money is art and working is art and good business is the best art - Andy Warhol
EUR 10x more likely to become
It is always nice to be
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Dr. Nick Riviera: Hey, don't worry. You don't have to make up stories here. Save that for court!
I was talking with a few HF
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mxc wrote: EUR 10x more
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RexAlpha wrote: Keep in mind
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Debt Restructuring is not a
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What are the next problems?
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The members of the currency
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