Is the Yuan About to Replace the Dollar as the World's Reserve Currency?


By Mish   Follow   Sun, 4 Nov 2012, 10:53pm   1,731 views   23 comments
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Is the Yuan About to Replace the Dollar as the World's Reserve Currency?
http://globaleconomicanalysis.blogspot.com/2012/11/is-yuan-about-to-replace-dollar-as.html
Mish

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  1. CaptainShuddup


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    1   8:02am Mon 5 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Ah Gee, if only China wasn't having an economic crisis of their own.
    If China has spent just 40% of what they spent on Ghost metropolises and infrastructure that went no where to keep their economy afloat, on building a bone crushing military. Then they would be this Super power that scares me.

    China much like America has been running the printing presses to give the illusion that they are growing. BUT unlike America they have been spending their money on tangible hard assets and infrastructure, instead of just padding bankers pockets to sock the money away and not put it back into the economy.

    I do how ever see all of this benefiting China immensely in the not so distant future, say 10 to 15 years away. When they finally figure out, that they are where we were after WWII, and stop trying to squeeze blood out of turnip. They built expecting to sell all those units to some buyer class that just doesn't exist. Not in China, not Europe, and certainly not America.

    When they realize that, and work to get people in those units rather than resigning to letting them rot. Then those communities will be come productive and their real growth will ensue.

    I just don't see China doing anything different than what they are now, until they make that change. Like America, it is the Middle class and a good standard of living that builds great economic powers.
    People in those countries fight like they've got a lot to lose, rather than an Army that a fight was imposed on them, to make life better for a class that is not in the fight.

  2. lostand confused


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    2   8:18am Mon 5 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    The Yuan is not even a free floating currency.

  3. michaelsch


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    3   2:46pm Thu 8 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    lostand confused says

    The Yuan is not even a free floating currency.

    So what?

    Until 1968 $USD was pegged to gold, which made the pair a reserve currency.

    Between 1968 and 1971 gold still remained the reserve currency, $USD was still pegged to gold, but one could not exchange $USD for gold on the free market, only thru trade between governments. That made $USD not a free floating currency. In 1971 R. Nixon stopped even this. But as the result $USD became the new world reserve currency and US economy since than was built around its trade deficit.

    The real issue is that having a reserve currency allows you to get foreign goods and services for free. It only makes sense for a nation that runs a trade deficit and builds its economy around it. That's definitely not what China wants at least for now.

  4. lostand confused


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    4   2:50pm Thu 8 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    michaelsch says

    So what?
    Until 1968 $USD was pegged to gold, which made the pair a reserve currency.
    Between 1968 and 1971 gold still remained the reserve currency, $USD was still pegged to gold, but one could not exchange $USD for gold on the free market, only thru trade between governments. That made $USD not a free floating currency. In 1971 R. Nixon stopped even this. But as the result $USD became the new world reserve currency and US economy since than was built around its trade deficit.
    The real issue is that having a reserve currency allows you to get foreign goods and services for free. It only makes sense for a nation that runs a trade deficit and builds its economy around it. That's definitely not what China wants at least for now.

    This is 2012, not 1968 and the topic is wether the Yuan will replace the USD to becoem reserve currency. The Yuan's exchange rate is set upto the last cent by the Chinese govt. That is not reserve currency material. They have along way to go.

  5. Bellingham Bill


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    5   3:15pm Thu 8 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    lostand confused says

    The Yuan's exchange rate is set upto the last cent by the Chinese govt.

    um, this is just set against the USD, not against some actual fixed benchmark of wealth (that can't actually exist anyway).

    here's a chart of the yuan:

    http://research.stlouisfed.org/fred2/series/EXCHUS

    JPY in red too, for the curious:

    http://research.stlouisfed.org/fred2/graph/?g=cCV

    The thing that makes a reserve currency is what stuff is denominated in it. Nothing more.

    Well, how well the money supply is controlled is another I guess.

  6. lostand confused


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    6   3:26pm Thu 8 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Yes against the USD . Melmakian says

    A peg does not disqualify a currency from being a 'reserve currency'. 'Free floating' isn't required either.
    But then again, you are lostand confused

    I was going to make a point, then realized it is you -or one of your multiple personalities. Why bother? Do not feed the trolls.

  7. michaelsch


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    7   3:27pm Thu 8 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Melmakian says

    lostand confused says

    The Yuan's exchange rate is set upto the last cent by the Chinese govt.

    So was the US dolar during the Bretton Woods era. $35/oz of gold, I believe.

    The difference though was that $USD was artificially kept above its market value, while now yuan is kept below. That's because USA at that time became an import economy, while China is still an export economy. That may change, but won't happen too soon.

  8. lostand confused


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    8   3:37pm Thu 8 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    To compare the Bretton Woods to what China is doing -oh well.

  9. justme


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    9   4:01pm Thu 8 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Reserve Currency == The currency in which the largest amount of public and private debt has been issued.

    This is what it really means. I am NOT joking.

    In other words, I think USD will be the reserve currency for quite a while.

  10. HEY YOU


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    10   5:24pm Fri 9 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Are those that deny the Yuan the same that believed that housing only appreciates?

  11. Philistine


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    11   2:05pm Sun 11 Nov 2012   Share   Quote   Permalink   Like (2)   Dislike  

    CaptainShuddup says

    When they realize that, and work to get people in those units rather than resigning to letting them rot

    I am in China right now. In a factory district. I can tell you from all the many visits, the highways are lined with ghost towns full of buildings that are already run down; unfinished on the inside; most have no windows. Not even the Chinese working class would inhabit these buildings.

    If China can "work to get people in those units", by the time it happens, these buildings will be ready to demolish. Most of the Chinese working class live at the factories in dorms, and they are not getting pay raises to be able to leave. There simply is no buyer class in China. When wealth is hoarded and wages are inhuman, this is the result.

  12. APOCALYPSEFUCKisShostikovitch


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    12   2:54pm Sun 11 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Philistine says

    If China can "work to get people in those units", by the time it happens, these buildings will be ready to demolish. Most of the Chinese working class live at the factories in dorms, and they are not getting pay raises to be able to leave. There simply is no buyer class in China. When wealth is hoarded and wages are inhuman, this is the result.

    This is exactly what Romney wanted for America, except that the politburo would be populated completely by Mormons.

  13. curious2


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    13   2:57pm Sun 11 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    APOCALYPSEFUCK is Shostakovich says

    This is exactly what Romney wanted for America, except that the politburo would be populated completely by Mormons.

    ...just as Elohim intended. Also millions of evildoers who defy Elohim, e.g. gay couples and eventually the majority of Americans who practice religions that Mormons call "abomination," would be housed in special prison factories making office furniture alongside the convicted (former) cannabis smokers, who are already there.

  14. David Losh


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    14   3:37pm Sun 11 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    I have read some of Mish's stuff over the years, usually what has been posted by some one else to make an economic point.

    I've never seen mass postings nor have I ever read the blog.

    The Yuan is a dead currency for all the reasons that have been laid out here, and have been laid out for the past four years.

    Yes, China wants to be a global economic power, but no, they don't have the ability. They have a billion people to feed every day.

  15. Rin


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    15   3:41pm Sun 11 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    There's one other point about currencies and that's of political stability, the ability for a system of govt to stay solvent, over the long haul. Thus, the UK/British Empire had provided that over the 19th century and the US, over the 20th century. And even today, despite the UK shrinking to the British Isles, Gibraltar, & the Falklands, the Pound is still one of the primary currencies of Europe, trading in similar patterns to the continental Euro, and is the top 3 and 4 in terms of volume traded and held reserves. I also suspect that despite the collapse of the overseas British Empire, the system of govt in the UK is still pretty much the same as earlier.

    In contrast, China just started opening up in 1977, upon Mao's passing. Then, came the Tiananmen Square crackdown, followed by a full blown central command/control type of high growth corporatism, where in effect, the govt has the right to seize any assets at any time. Land ownership rights are simply leasing agreements, little more. With the above as a backdrop, what faith can international investing pools have, that their cash is safe for the long haul, in the coffers of China Inc?

  16. Rin


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    16   6:12pm Mon 12 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Melmakian says

    Rin says

    [ snip ] With the above as a backdrop, what faith can international investing pools have, that their cash is safe for the long haul, in the coffers of China Inc?

    China and India *can* supplant the dollar. Most likely over the long haul it will be India and not China, unless China steps up and makes its currency and domestic debt desirable for foreigners to hold and use for trade amongst themselves.

    I think we may see something a bit different, coming out of Asia during this century. I don't believe either India or China will be these economic standalone complexes, with the same degree of transparency, as the US or UK of old. Instead, the entire east Asian bloc will grow (all nations including Malaysia, Thailand, Philippines, Vietnam, etc), using a basket of international currencies like the Sing dollar, the USD, the Yen, the Pound, the Aussie, and others, in place of trusting one anothers' systems of gpvt. That's what I'd noticed among business alliances in that region. East Asian nations are more or less, economic rivals and they'd much rather trust the British or American papers & assets over regions, where nationalization of assets could occur at random.

  17. Rin


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    17   7:27pm Mon 12 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    robertoaribas says

    Philippines, Vietnam, and japan are on the edge of shooting at china... I wouldn't count on any close alliance, Thailand, the Philippines, Korea and Japan have military alliances with the US....

    And that's basically it, east Asia is a multipolar region, unlike North America. Despite the growth and developments of the nations in the region, they intrinsically don't trust one another, esp China Inc. Thus, the notion of having major holdings in Chinese paper, whether or not it's in bonds, currencies, or even options, strikes fear of future confiscations or forced devaluations. Hence, despite the reoccurring negative opinions of the US, by citizens of the various countries in the Americas or Europe, they all trust US asset classes. That's why the US continues to be a major player in world financial markets.

  18. Rin


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    18   9:48pm Mon 12 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    robertoaribas says

    The US will toss off this economic funk, and grow our way right out of the debt in the medium term...China is a hell of along ways from ever becoming what the US already is.

    The thing is that the media always loves an economic bogeyman. In the 80s, it was Japan Inc vs USA (our burgeoning Rust Belt); now, it's China & India vs Uncle Sam. The real miracle story, however, was that of Singapore, Taiwan, & South Korea for much of that past quarter century. Those nations really came up fast, without the popular press even noticing them.

    In the future, it'll be other Asian nations, crossing the digital divide and becoming world players in technology and services. In that, neither China nor India need to be bogeymen nor rivals. They'll be among the Asia-Pacific bloc of nations, now providing high end products and services, but using American assets as a long term store of wealth and diversification. This was the strategy that the British used, once their Empire started their long term decline. The US will do the same, but still retain a lot in terms of natural resources, technology, and financial services.

  19. Bellingham Bill


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    19   3:00am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    robertoaribas says

    The US will toss off this economic funk, and grow our way right out of the debt in the medium term

    http://research.stlouisfed.org/fred2/graph/?g=cLG

    while I should not be a permabear for my sanity, our problems are very, very serious.

    "Growth" is great and I see some areas we can get it but we really need to get our collective act together to see this happen.

    We need more GDP per joule, or at least less expensive joules and -- let us not forget -- less polluting joules.

    CBO is predicting a $20T real economy by 2020. $5T in growth this decade, ~$30,000 per output more per worker than today (which is $120,000).

    We can get that by increasing the workforce 25% and/or 25% more productive.

    We do not live entirely in a virtual economy yet, and the higher greenhouse gases rise we may see actually less productive agriculture on balance.

    The story of this decade and next is the baby boom entrance into retirement. The boomers are aged 48 to 66 now and there are 50M+ seniors on Medicare now. This will rise to 80M by 2030.

    If we can improve our medical sector productivity -- currently the worse in the world, at $8500 per person in health costs -- we can mitigate the economic burden this will be.

    The baby boom has largely "pre-funded" their retirement with their $2.6T in the social security trust fund and other "savings", but at the end of the day their consumption while retired is going to have to be provided by the working.

    And they are going to consume a lot! Life expectancy at age 65 is ~19 years -- this is a $30T retirement cost we're going to have to bear, while our 0-20 age group is also growing, meaning our total support burden is going to continue increasing from now.

    Things are arguably fixable, but we have to commit ourselves to fixing them for them to get fixed.

    Politically, this country is still a mess. We've got shrek here now declaring armed resistance because he and his fellow nutballs don't want to be dragged out of the 19th century -- and there are still tens of millions of broken minds like his running around in this country.

    We've spent so much time dealing with the right wing's crap these past 20 years that we haven't focused on actually fixing anything here at home. "free trade" with China and Mexico [that giant sucking sound], Gramm-Leach-Bliley:

    http://research.stlouisfed.org/fred2/graph/?g=cLH

    $2T in wars or whatever, the Bush mortgage credit bubble/bust, and the rising systemic imbalances in our economy:

    http://research.stlouisfed.org/fred2/series/GINIALLRH

    skyrocketing corporate profits:

    http://research.stlouisfed.org/fred2/series/CP

    while we continue to borrow from the rich to keep the game going:

    http://research.stlouisfed.org/fred2/graph/?g=cLI

    which reminds me that we are fractally fucked at the national, state, and in my case county & city levels -- probably yours too.

    To fix things on the fiscal side is going to require DOUBLE the tax level from everyone. How's your business model look in that regime?

    robertoaribas says

    China is a hell of along ways from ever becoming what the US already is.

    And yet, it is us who owe them $1.15T, and not the other way around.

    If we're so great why does the world own five and a half trillion of our public debt?

    Here's the leaderboard of net capital positions:

    now, what really matters is the servicing burden / collected yield, not the position per se, and things aren't quite as bad as this table suggests on that score (much of our debt isn't costing us much).

  20. chemechie


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    20   7:00am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    To return to the original point of this thread, one thing required to be a reserve currency is that there has to be enough of it floating around to "fill in" everybodies demands for it - only the dollar has enough trillions in circulation to be a widely used 'common denominator' for international transactions; there aren't enough Yuan (or any other currency) floating around to use in place of the USD.
    Melmakian says

    Which is why I mentioned India...as unlikely a candidate as it may seem now...because India will dominate the Indian Ocean while keeping out of the whole Asian Pacific fracas.

    You have a very good point - while many people are fixated on China's rise, India's rise has been mostly ignored. They have the added benefit of being a democracy and getting along with their neighbors, unlike China who has territorial disputes with every one of their neighbors - if they maintain their current level of belligerence, they could force their neighbors into alliances for self preservation.

  21. Rin


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    21   10:09am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    chemechie says

    while many people are fixated on China's rise, India's rise has been mostly ignored. They have the added benefit of being a democracy and getting along with their neighbors

    For the most part, I don't believe in the rise of India, as a type of pseudo-world power.

    The business environs & politics of India are completely Byzantine and unreal for a lot of westerners. For the most part, many partners (not just US ones, but also regional ones), have virtually no idea how to navigate India's complex labyrinth of bribes and whose backs, one needs to scratch, to get anything done.

    If you look at let's say Bangalore Inc, the IT capital of India, despite having had billions dumped into hiring headcount for both the support and develop of software, at most, they were a body shop, doing minimal value-added work, and delivering entry level quality back to their Northern American and European clients.

    With that level of investment in software, India failed to pull off a type of post-Meiji Japan, where Japan went from being feudal to an industrial empire within a single generation. Instead, a lot of how India operates is not too distinct from when the British Empire was still there, in other words, it's only caught up to perhaps the early 80s, struggling with a single generation of nascent democracy. The Brit's favorite "divide/conquer" Maharajas and others have may changed names and forms, however, the song remains the same. But now, the tide is turning as many of those call centers and IT projects are either coming back to the US or finding a home in other Asian countries.

    But sure, in time, perhaps 2030 or beyond, a lot of this stuff may clear up and India may return to higher growth but with transparency, however, at that time, it won't be alone as everyone else in the world will be doing the same thing.

  22. Rin


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    22   11:04am Fri 16 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Looks like someone compiled a hefty story on the history and extent of corruption in India ...

    http://en.wikipedia.org/wiki/Corruption_in_India

    I was aware of some of the above but not all of it. I think this will take another generation to work through.

  23. chemechie


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    23   8:39am Wed 5 Dec 2012   Share   Quote   Permalink   Like   Dislike  

    Rin says

    http://en.wikipedia.org/wiki/Corruption_in_India
    I was aware of some of the above but not all of it. I think this will take another generation to work through.

    IF it gets worked through - Russia, most of Africa, etc. have not worked on their corruption problems and instead regressed (moved backwards).

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