China has taken yet another step to transform the yuan into the dominant global currency, a long-term initiative that could ultimately dethrone the dollar as the world's top unit of exchange.
In the last four months alone, China has signed currency swapagreements worth more than $95 billion (650 billion yuan) with an array of nations – including: Argentina, South Korea, Indonesia, Malaysia, Belarus and Hong Kong – that are only too glad to move away from the increasingly shaky U.S. dollar.
For Westerners who are struggling to come to terms with the notion of a disarrayed dollar, the thought of oil, gold or other commodities being priced in yuan instead of dollars has to seem about as likely as having another country put a man on the moon.
But the Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange and the proverbial genie, as they say, is out of the bottle. In fact, I'd even go so far as to say the dollar's days of dominance are numbered and with each new round of bailout chicanery, the clock is winding down ever faster.
Asia's Long-Term View
In such Asian markets as Japan, Hong Kong and Mainland China, the long-term planning that's an anathema to Corporate America is actually standard fare. During the height of Japan's dominance in the 1980s, the Western business press – with a touch of derision – wrote about how some Japanese companies routinely formulated business plans with durations of 100 years or more (while working in Asia early in my career, I actually even contributed to several such plans … but that's another story for another time).
That's neither here nor there to most people who note smugly that Japan is getting its comeuppance. But what they don't understand is that Japan is not alone. In fact, many people I talk with are shocked to learn that at a time when the West is still busy handing out Band-Aids in an attempt to deal with the greatest financial crisis on record, China has been quietly and shrewdly reinventing itself with the same kind of long-term vision.
Take commodities, for example. While companies in the United States, Great Britain and Europe are being forced to shed promising assets in order to compensate for massive losses or to pay down debt, cash-rich China has been able to operate as a buyer in a buyer's market. While the rest of the world has interpreted this as a sign that China's interested in buying the things it needs to grow, what they have not understood is that China's also interested in using physical assets as a source of "currency" that offsets an increasingly eviscerated U.S. dollar.
This is actually a double-whammy of sorts, for while the rest of the world has been grappling with the global slowdown, China has been locking up supplies of commodities that are only going to become more scarce (and more valuable) as global demand escalates.
In fact, as I've suggested for months, now, China isn't just going to consume those assets; it's going to use them as part of the same long-term vision it's been staking out with regard to its own currency, the yuan, which it fully intends to boost in status to the point where it becomes an internationally accepted currency.
The Once-Dominant Dollar
That's quite a turn of events.
Even now, despite the travails of the U.S. economy, the dollar remains the world's most widely held reserve currency and, as such, is the standard unit of exchange in most international transactions. In fact, many non-U.S. firms (such as Airbus SAS) actually price their manufactured products in dollars. And the dollar is the de facto unit of pricing for such commodities as oil (hence the term "petrodollar"). Several countries even use it as their "official" currency.
But the global financial crisis is threatening that dominance.
The United States has already "injected" into the world economy trillions of dollars that are collectively worth more than 60% of this country's entire gross domestic product (GDP). And the prospect of still more injections for California, GMAC LLC and other "national" interests is extremely worrisome – and not just to millions of Americans, either. If Washington stays on this path, the result will be a currency crisis the likes of which few are capable of imagining and a near-complete devaluation of the once-almighty U.S. dollar.
Ironically, both events will only further embolden China, speeding up its efforts to boost the yuan's international acceptance.
The "New" Yuan
While some experts may question Beijing's motives, it's hard to question China's long-term strategic vision, since the country is actually being forced to take these steps that ensure its own survival. Unfortunately, our leaders in Washington don't seem to understand this, so they're only making matters worse – when they instead could be actively working with China and the world community on this instead of summarily ignoring the fact that the yuan may well be the world's next reserve currency.
At the very least, China's currency is likely to be granted a global status on par with the current major currency trading pairs for purposes of settling international transactions, whether the West wants that to happen or not.
I've outlined this scenario many times in recent years and, quite frankly, too often received blank stares in return. Most folks here in the West just aren't prepared to deal with the idea that the U.S. dollar could be finished and that another currency could replace it after more than 60 years of global dominance. But they better get used to the idea – and in a hurry.
China is acutely aware that not having international currency convertibility hampers both its development and – thanks to the ongoing financial crisis – its potential survival. Not only has China been forced to accept huge reserves built upon previous trade growth (its $2 trillion in reserves is an all-time record), but its own policies have contributed to its relative inability to flex its capital-market muscles. That's especially true in transactions involving U.S. dollar/yuan exchange rates.
What for us sounds quite theoretical in nature represents a very real problem for businessmen such as Dong Xianbin, the chairman of the Guangxi Sanhuan Enterprise Group Holding Co. Ltd. He estimates that he's lost more than 150 million yuan (about $22 million at current exchange rates) on international trade in the past three years alone because of exchange rate changes between the dollar and the yuan. So he's keen to see yuan-based transactions that will reduce exchange-rate risks, or eliminate them entirely. And he's not alone. Thousands of Chinese companies are chomping at the bit for the same reasons.
As a nation, not having a universally accepted currency is a huge issue. China's record reserves are now at risk thanks to the U.S. government's bailout boondoggle, because each new greenback printed debases the value of every other dollar out there, including the ones China holds.
Historically, Beijing sought to mitigate that risk by diversifying its holdings into other currencies most notably the European euro and the Swiss franc, for instance. But now China's facing the kinds of problems that massive mutual funds closer to home must deal with when they hold a disproportionately large amount of money: China's reserve fund is so massive that there's literally no other single currency that can absorb all that liquidity. So even if China wanted to diversify more aggressively, it's going to be hard pressed to do so.
Incidentally, this is precisely why China's so-called "nuclear option" will never become more than a theory bandied about by conspiracy buffs. Under such a scenario, China will either "dump" its dollars, and/or stop buying them, causing the value of the greenback to plummet. China might start selling, but there literally is not another currency on the planet that could absorb a wholesale liquidation.
Therefore, the reality is that China needs to have the U.S. boost the value of the dollar – even as the United States needs to have China do all it can to maintain the dollar's value.
Shopping for Commodities
At this point in time, China essentially has two alternatives:
- It can seek out other stores of value, such as natural resources, which are highly liquid and reasonably "deep" in global markets, but which can also be very volatile from a pricing standpoint.
- Or it can elevate the credibility of its own currency in the international financial markets and effectively remove the exchange rate risks associated with its own partially blocked yuan.
Never one to leave anything to chance, China is pursuing both strategies. For instance, China's been buying gold like there's no tomorrow – and is looking to add to its holdings. Since 2003, China has boosted its holdings of gold by 73% to an estimated 1,054 metric tons, with an approximate value of $31.3 billion. This makes China the fifth-largest holder of gold on the planet, followed by the United States, Greater Europe, and Switzerland.
China's also gone global in its hunt for oil – which, of course, is the only other global "currency" truly in international demand.
While there's a real benefit to having locked up supplies of commodities, they aren't an ideal store of value. And that suggests that what China really needs to do is elevate the global prominence of its own currency at the same time, whether U.S. leaders aid the process or not.
History shows that strong economies tend to have strong currencies. And the actions that I've reported on recently from China – the cross-Straits agreements reached between China and Taiwan, the Hong Kong yuan-trade agreements and the "yuan carry trade," to name a few – only reinforce the effort China is putting forth to achieve this goal.
Speaking of goals … there are obviously plenty of Doubting Thomases on this issue – but they were around years ago before China announced that it wants to put a man on the moon by 2020.
[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald just recently completed his investing tour of China. His conclusion: Every investor has to have a China strategy. As this essay shows, the global financial crisis has re-written the rules for global investing. It's also generating a whole host of new profit plays, having created what Fitz-Gerald likes to call "The Golden Age of Wealth Creation ." Investors who ignore this "New Reality" will get left behind. But those with the courage and conviction to press ahead could well find this to be the greatest profit opportunity of their lifetime. China's just one such opportunity. To find out about the others, please click here .]
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News and Related Story Links:
- Money Morning Special Report:
How the New 'Yuan Carry Trade' Will Add to China's Global Muscle, and Possibly Even Accelerate the U.S. Recovery. - Wikipedia:
Currency Swap. - Money Morning News Analysis:
China Flexes its Muscles and Finds Support in a Bid to Dump the Dollar as the World's Main Reserve Currency. - Wikipedia:
The Renminbi. - Money Morning News:
What Companies Are Profiting From China's Commodities Crusade? - Wikipedia:
Petrodollar. - Money Morning Market Analysis:
Profit from China's 'Nuclear Option.' - Money Morning News Analysis:
China/Taiwan Investment Accords Will Lead to Profit Plays for Investors. - News Sophisticate:
China: Man on the Moon by 2020? First Lunar Orbiter Launch Successful.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.
By the way, all of this was predicted thousands of years ago and it's going along on schedule. If you don't know that you're missing a gigantic puzzle piece. It's a study worth your time. Go Here http://www.thercg.org/sep/home.html
I believe that the Chinese renminbi (aka yuan) will replace the US dollar as the world standard for international trade if the US government continues to borrow and then spend a lot of money (with the careless abandon of a drunken sailor on shore leave)?
This is very disturbing to those very same foreigners that the USA hopes will buy our freshly printed currencies (hopefully at not too much of a discount) to pay for our economic stimulation, our imported consumables, and our other government expenses. The discounts offered at public bid by manufacturing nations that have the dollars will depend upon the confidence that we instill these foreigners by our economic actions. Many countries are losing confidence in the dollar as the benchmark for world trade and currency values. Other currencies, like the Chinese Yuan with a more stable value, are now being talked about as a replacement for the US Dollar as the benchmark for international currency values.
Why does any foreigner with US dollars earned by making things for US consumers buy these freshly printed-paper US securities if they cannot be redeemed for gold? Because these printed-paper US securities can be redeemed by foreign entities for title to US real estate, farms, agri-businesses, food supplies, dairies, forests, industries, breweries, hotels, factories, casinos, financial institutions, retail businesses, and most other assets located in the USA, instead of redeeming these dollars for gold. Some US government sources estimate that the title to 25% of our assets with recorded deeds and titles are now listed as foreign owned (http://economyincrisis.org/articles/show/1072) and this percentage is increasing rapidly. Our payments to foreign oil and foreign raw material suppliers are handled in essentially this same manner.
The USA has created a situation that US gold; US currency; and title to US property and other assets are leaving the USA in amounts of value greater than they would be if US citizens were manufacturing the things that US citizens consumed. We must change this situation or we could become a post WWI Germany economically, and this could happen overnight.
A Trade Deficit is created when the USA importing, transportation, distributing and retail sales companies such as WalMart, Home Depot, NTB and etc. pay companies and individuals in foreign countries with US dollars to manufacture the things that these US businesses import, distribute, and then sell to the US consumers. Manufacturers such as GM, Ford, GE, Chrysler, GE, Westinghouse and etc. manufacture vehicles, appliances, and equipment made with imported parts that they paid the companies in the foreign countries with US currency to manufacture these parts for assembly of the finished product in the USA that is then sold to US consumers. What is the dollar value percentage of USA assembled products that are made with imported foreign manufactured parts and/or sub-assemblies?
The only thing that will create/save US jobs, preserve/restore the buying power of the US Dollar is reversing the trade deficit, reducing government borrowing, reducing government spending, and then re-building our gold reserves. Only a positive balance of trade will restore the value of the dollar, and we must accomplish this by any means possible, or accept third world poverty on a large-scale basis. The only way to do this is to produce and export more (dollar value of) things than we import. The only way that we can accomplish exporting US made products is to re-industrialize and make these products with US materials & Labor. The only way that our products will be sold abroad is if these products are either technologically superior, or cheaper.
Mr. Fitz-Gerald is quite right and failed to mention that China's government has a silent agreement with the population. The population will not revolt so long as the government can provide jobs. No jobs, No Peace!
Chinese leaders are pressured to make their country prosperous and they see that there is risk and great opportunity in their future.
Rather than adopt another national currency as the next primary global reserve currency, the world should move to support a common currency which is managed by a monetary union central bank. The Chinese proposal of a new global reserve currency is consistent with this idea.
When such a currency supports countries with 40-50% of the world's GDP, that currency will become the defacto Single Global Currency, and the "tipping point" momentum will favor its continued growth, until it supports all the countries of the world. Thus will come the Single Global Currency managed by a Global Central Bank within a Global Monetary Union, and the benefits can be measured in the trillions, annually.
Such a Single Global Currency will provide what the people of the world want – stable money.
The primary problem for the euro and every regional monetary union today is that they must still exist in the multicurrency world where the value of its currency will fluctuate against other currencies.
If 16 countries can use the same currency, why not the 192 U.N. members? Those 192 countries now use 141 currencies and the number is dropping annually. The euro is definitely a harbinger of the future, and soon all 25 EU members will be part of the EMU, and by then, there
will be more EU members to add. Several of the remaining non-euro EU members are now seeking admission as soon as possible. The IMF has even urged several EU members to "euroize" even before completing the standard
accession process.
In addition to eliminating currency fluctuations, the use of a Single Global Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate currency risk, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totaling more than $6 trillion); and bring other benefits worth trillions, such as reducing the impact of global financial turmoil such as we are now experiencing.
The Single Global Currency Assn.(www.singleglobalcurrency.org) promotes the implementation of a Single Global Currency by 2024, the 80th
anniversary of the 1944 conference. That’s only 15 years away.
The world is moving toward a Single Global Currency through the creation, expansion and merger of regional monetary unions. Other routes are through "ization" (as in "dollarization"and "euroization") and international monetary conferences proposals and agreements, such as were seen at Bretton Woods. The merger of the eurozone with one or two other currencies is one possible route to a Single Global Currency.
The challenge now is to reach that goal deliberately, as soon as possible, with as little cost and as few crises as possible. If the eurozone were to merge with the U.S. dollar of the yen, or if the yen and the U.S. dollar were to form a monetary union, the road to a Single Global Currency would be clear.
The only remaining questions about implementation of a Single Global Currency are: when? and how much cost and turmoil will the world endure before that implementation.
See the book, "The Single Global Currency – Common Cents for the World."
Morrison Bonpasse
Single Global Currency Assn.
Newcastle, Maine, United States
It is not the Chinese dethroning USD… It is the US officials who are printing USD madly trying to save inefficient banks and non renovating companies who lost their competing edge like GM …
USA has one way to restore this confidence…. let them fail…let them be bought up by efficient entrepreneurs…
NO PAIN NO GAIN…
Capitalist system is a whole…if you play with it, you get a semi-socialist system which is destined to fail in time….
Wanting to become the World's reserve currency and becoming so are two very different matters. Writing about Mr. Fitz-Geralds thesis and others, Arthur Kroeber strongly disagrees, and writes in today's Financial Times (p. 8) "Don't believe the renminbi hype"
"One baleful consequence of the global financial crisis has been a swarm of ill-informed commentary about the decline of the US and the dollar, and the rise of China and the renminbi. Such hyperbolic claims about a tectonic shift in global power relations are bunkum.
Since last November, the People's Bank of China has initiated more than $100bn in renminbi swap lines with various other central banks, mainly in the developing world. There also has been lots of noise about increasing the use of renminbi in regional trade transactions.
These developments have led many to speculate that China aims to make the renminbi a major global currency, and that it is just a matter of time before the currency of the world's largest creditor supplants that of the world's biggest debtor as the major global reserve asset.
On the potential for the renminbi itself as a reserve currency, commentators frequently confuse three distinct concepts: currency internationalisation, reserve currency, and dominant global reserve currency.
The renminbi will clearly internationalise significantly over the next five to 10 years. Over a longer period (10-20 years) it may emerge as a secondary reserve currency like the Japanese yen, although this is not certain.
But for it to replace the dollar as the main global reserve currency, many decades and a combination of improbable events would be needed.
Plenty of currencies internationalise without becoming substantial vehicles for reserve holdings (Swiss franc, Singapore dollar, etc). The renminbi will certainly become far more widely used in many countries because of China's large role in global trade and the vast numbers of Chinese business and leisure travellers who will trot the globe.
Swaps and trade facilities may help this internationalisation, though it is worth noting that the talk of denominating trade transactions in renminbi remains mostly talk (the practicalities are inconvenient), and the total swap lines initiated by the PBoC since last September are about one-fifth of the international swap lines opened by the US Federal Reserve during the same period.
Internationalisation – ie the increased use of a currency in current-account transactions – is a necessary but insufficient condition for a reserve currency, which emerges only when people want to hold and invest large balances of that currency.
For the renminbi to become a vehicle for reserve holdings, foreigners must be able to invest freely in onshore renminbi financial assets (stocks, bonds and bank deposits), and freely repatriate both their earnings and their capital. For foreign investors to want to hold renminbi assets on a large scale, they must be convinced that China's financial markets are trustworthy and not rigged.
For the renminbi to become even a secondary reserve currency, it must therefore fully liberalise its capital account and set up reliable financial markets that are reasonably free of government interference. Technical difficulties aside, this will require a significant retreat from the current state-dominated model of credit allocation – and this cannot happen quickly.
The US dollar's position as the dominant global reserve currency is secure. It boils down to this: in a fiat currency world (unlike the gold and quasi-gold standards that prevailed until 1971), the dominant reserve currency nation must be a net debtor, not a net creditor.
This is because the principal reserve asset is the debt securities of the reserve nation. Other countries must have current-account surpluses that they can invest in those debt securities, so the reserve nation itself must run a current-account deficit. (The problem of recent years was not that the US ran a current-account deficit, but that the deficit grew too large – nearly 7 per cent of gross domestic product rather than the sustainable 1 per cent of GDP or so.)
So if China wants the renminbi to become the world's main reserve currency, one condition is clear: it must abandon mercantilism and start running a current account deficit. Until it is willing to satisfy that condition, all talk about the future dominance of the renminbi is the purest hot air." (Financial Times, 5/27/2009)
"Have Faith My Son", the US of A will get through these hard times just as 'easy' as China will. Without the US consumer China has also learned a lesson as their Real Economic Growth has dropped from a high of 14% to only 6.1%, putting China in just as tight a spot as the US. The size of the US economy is HUGE compared to China and can turn around quickly if managed properly. Without the actions taken by the Government, we would fall into a deep 10 year depression with unbearable pain for the public. Dont worry about America it will come out of this banking and market crises even stronger and a lot more humble. In 15 years with 1.5 billion people, China will have the largest economy, but America will have a big piece of it–I know we do business in China every day.
"In an exclusive interview with BBC News Online he said he wanted to clarify news reports in the Chinese media that Beijing would be putting a man on the Moon by 2010 with the establishment of a Moonbase soon afterwards.
"We will explore the Moon certainly," he said from his office in Beijing, "but with unmanned spacecraft." "
From BBC news.
Not that it matters to the subject but just to let it straight.
Please ignored my previous message. The article was from 2002.
Well if you look back through history there has been a change in dominant ownership of the world currency in the 40s it changed from £ to $ then in the 70s we went from a Gold standard to a US printing machine now we are reaching a new cycle (30 years). So its either the Yuan or the Euro, the world wants a currency that has lots of positive liquidity. sorry US but you pants yourself and got a wedgy at the same time
[…] promising assets in order to compensate for massive losses or to pay down debt, cash-rich China has been able to operate as a buyer in a buyer's market," said Money Morning Investment Director Keith Fitz-Gerald. "While the rest of the […]
National Wealth and economic value is created only when you grow something in the earth, extract something from the earth, or make (manufacture or construct) something that is consumable (or useful). Transportation/distribution/warehousing/tax/sales/delivery/packaging costs are added to the value (cost) of the product that was initially created by these basic creative efforts.
Industrious nations like China grow wealthy and secure by making enough products to support their needs on their farms, factories and mines, plus earn additional currency by creating additional wealth by exporting products that they manufactured. The health of every other business depends upon these productive industries.
Do US farms, factories, and mines manufacture, grow or mine enough products to maintain us? NO!!! Could They? YES! Do we need to import additional products and increase the current trade deficit if we do not want to work to make whatever we want to consume? YES!!!
Borrowing money from China and other wealth generating nations to pay US citizens for raking leaves, environmental cleanup, mortgage bailout, union retirements, TARP, business failures, and etc. to stimulate the economy just makes the existing money have less value and less buying power, but does nothing in the long run solution to the foreign trade deficit problem.
Many of my (college educated) friends tell me that this modern economy needs the consumers who do not produce anything but sit idle and consume the things that the workers produce. This is like saying that a slave needs an owner to sit idle and consume the things that the slave works hard and produces for the slave owner's consumption. The slave does not need an owner.
Why can't we just print more paper dollars, T-Bills, bonds and other paper securities and sell them to people in other countries that work to manufacture the things that we consume? We can remain idle and refrain from working while our children work hard later to pay off these bonds and other debts at some later date when they become due. Our children should be happy to work and pay for our priviledge of not working.
Our Political Leaders must lobby loudly and become persistent in their quest for implementing at least an extremely high import tariff on all imported goods, and repeal of the NAFTA, WTO, IMF, and maybe complete withdrawal from the United Nations.
If we want to rebuild our industries, we will need the funding to do it. Do you really think that China and Japan (our leading creditors) or any one else will really give us loans to re-build our manufacturing capability? Will Chinese entities become loan sharks after we sell all of our assets to the foreigners in return for our trade imports of the products that we consume? I just hope it is not too late already.
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