China's Plans for Replacing the Dollar

Time ^ | 7/21/09

[FromLori]

China's swipes at the U.S. dollar have been spilling out of Beijing with almost mundane regularity. Every time there is an international economic summit, it seems that some Chinese mandarin reiterates the now familiar complaint that the greenback needs to be replaced as the world's de facto reserve currency. China usually suggests some "supranational" currency as a dollar substitute, to protect it against instability that could arise from any one country's errant economic policies. A favorite suggestion is the use of Special Drawing Rights (SDRs), the unit of account at the International Monetary Fund.

But Beijing's leaders may also see China's own currency, the yuan (also known as the renminbi), as a possible alternative to the dollar. There are indications that China intends to make the yuan a greater factor in international trade and investment, a development that, if successful, would have major implications for the global financial system. HSBC economist Qu Hongbin believes that the yuan could become one of the top three currencies in the world by 2012, with some $2 trillion in trade transacted in the Chinese currency each year. "The internationalization of the renminbi has become a leading item on the policy agenda" in Beijing, Qu concluded in a recent report. (See pictures of the global financial crisis.)

[FromLori]

Related..

http://market-ticker.denninger.net/archives/1243-Whats-Powering-This-Rise.html

http://www.marketskeptics.com/2009/07/dollar-index-starting-to-break-down.html

[ken21]

certainly no one can argue that the american finance people acted responsibly.

if i were the chicoms, brazilians, russians, i too would be eyeing the advantages that the u.s. holds de facto with the dollar.

[sanchmo]

Replace the dollar with the yuan? Probably several centuries premature.
- Yuan is not convertible, and have made only modest attempts at Hong Kong convertability.
- Plus trust in its numbers and business environment is not the best.
- While they continue to talk down the dollar (at least in the long term), they also call for support for the dollar in the near term (http://www.freerepublic.com/focus/news/2293089/posts?page=4#4).
- China is attracting private investment (http://www.freerepublic.com/focus/f-news/2293494/posts)
- but their sovereign offerings keep failing (http://www.freerepublic.com/focus/news/2296642/posts?page=18).

This last item is most interesting right now. They lend to us cheap, but are unable to borrow all they want dear. Hm.

[sanchmo]

Oops, I didn’t mean “several centuries” - I meant to type “a century” then wanted to change it to “several decades” and goofed.

[FromLori]

Actually china has been having difficulty raising debt so yes but they have been using the yuan to trade with countries who do not care about the dollar anymore like brazil.

http://benbittrolff.blogspot.com/2009/07/china-having-difficulty-raising-debt.html

FN: This is the third failure in two weeks. The government will now spring into action and apply some heavy handed solutions... but the point remains: It is becoming more and more difficult to raise massive amounts of debt. It is simple really. Every country in the world is raising record amounts of debt. That just can’t work out. The math won’t allow it. The savings aren’t there and where they are, they are already deployed. This means they have to be pulled from such things as equities... eventually... to finance this debt.

Worse yet, if the Chinese can’t secure funding internally for their debt they will eventually have to convert some of their dollar holdings back into Yuan. That means they’ll have to sell US Treasuries first, and then sell US dollars to buy Yuan.

China Fails to Complete 20 Bln Yuan of Bill Sales, Traders Say: “China’s finance ministry failed to meet its debt-sale target for a third time in two weeks at a 182- day bill sale, according to traders at Galaxy Securities Co. and China Citic Bank in Beijing. The ministry had tried to sell 20 billion yuan of bills and only sold 18.51 billion yuan, traders said. The average yield for the bills sold was 1.6011 percent, they said.

The average yield was 21 basis points higher than the 1.39 percent in secondary market trading yesterday, based on rates compiled by Chinabond, the nation’s biggest debt-clearing house. The government last sold similar-maturity bills on June 19 at 0.85 percent. A basis point is 0.01 percentage point.”