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?
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 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 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.
@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
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.
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.
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.
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.
Currently, the only currencies capable of replacing the USD as reserve currency (euro and yen) have far worse problems. All sound currencies such as the CHF, AUD, or SGD are simply too small. There just wont be much stiff competition for the USD until(if) the yuan is allowed to appreciate.
What do you guys think of ths? http://www.zerohedge.com/article/how-china-just-implemented-stealth-bai…
[quote=Hamilton]What do you guys think of ths? http://www.zerohedge.com/article/how-china-just-implemented-stealth-bai…] Holy shit.....
Heard about that a while ago, not all that unexpected. My money's on the next financial crisis starting in China.
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".
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.
EUR 10x more likely to become reserve currency (it already is somewhat) than the Yuan.
Would you guys have 80% of your assets in Yuan? No.
Exactly
But the concentrated private wealth (worldwide) is overall $110 billion, $57 billion were held in US.
When there´s an upcoming trend in changing private wealth reserves in dollar to euro by US Residents, the dollar will truly surpassed by the Euro.
Keep in mind that there is instability in the EMU but not in the trade union of EU. EU parliament and ECB must together stabilize the Euro currency by freezing Greece, Spain, Portugal and Italy out of the EMU, when this gonna happen, we will have Euro stability and I see the Euro up risin to $2
And why would they do that? The EU core has too much to gain from a weak euro and if the PIIGS are allowed to leave the euro and devalue, banks in the core will take a far greater hit than if their debt is restructured.
It is always nice to be patriotic. That said, I always find that home bias quite amusing. The reserve currency status will depend more on prices being denominated in that currency, as long as most commodities are still being priced in USD in international trade, the USD will stay as the most important held currency, just like GBP was before WW2. It does not depend on specific country qualities that one deem positive, like political freedom or civil rights. If, say one wanted to buy goods from brazil being in south africa and the custom were prices to be in Renminbi, it would be the most important reserve currency, independent on China being a party dictatorship. The stability argument, as a hedge, is not enough for a currency to be the strongest reserve one.
I was talking with a few HF guys in London about buying Greek CDS to profit from a bankrupt in Greece
Today german ministry of finance announced that they would support a debt refinancing for Greece.
In my opinion the greatest fault of EU parliament was to integrate week Euro states into the EMU. Portugal, Spain, Greece and also Italy (Corruption, High state debts).
A dominating EMU consisting of Germany, UK, France, Scandinavian countries and the Benelux states maybe would have replaced the Dollar as World Currency up to 2005. And maybe the impact of the financial crisis 2007 would have been smaller to Europe and Asia.
Never give the power to make decisions concerning financial regulation into the hands of politicians.
Debt Restructuring is not a solution for the consisting problem.
Your point is right, but imagine what will happen when debt is restructured or refinanced, then we have 2014,2015 the next problems.
In media and finance all people were talking about Spain, Portugal and Greece. Italy must refinance €150-€200 billion every year up to 2015.
You see my point, its better to freeze out these bankrupt-candidates, you´ll never know what they´re probably can cause...
The USA is in a much better position than the EU, they have a closed financial system and much other benefits the EU do not have.
What are the next problems? If a form of the Brady plan is extended to PIG bonds, banks will be able to recover 50% or more in exchange for the concerned countries reforming their economies without getting crushed by over-the-top austerity measures.
I don't think the currency union is a problem in of itself. The PIGS crisis is an extension of the credit crisis, where deleveraging is proving exceptionally painful for the least productive members of the euro-area. Absent devaluing their currency, countries on the periphery are forced to rely on increased fiscal cooperation within the union. Kicking out the periphery from the EU will only serve to reduce demand for the core's goods as the euro strengthens and the periphery's access to it's trade partners is lessened.
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