Chinese Yuan to be International Currency

• Reports are coming in that the Chinese government intends to internationalize the Yuan (RenMinBi). As a 1st step the government will :  
   
  BEIJING (AFP) — China will use the yuan in transactions with neighbouring economies on a trial basis, state media said Thursday, calling it a potential first step to making it an international currency.The government will allow the yuan to be used in settlements between the Pearl and Yangtze river delta regions — both major industrial areas — and Hong Kong and Macau, the China Daily reported.Similarly, southwest China’s Yunnan province and Guangxi Zhuang region in the south will be permitted to use the yuan in settling trade with members of the Association of Southeast Asian Nations. (ASEAN)
   
• Why would China want to do this? International trade is mainly settled via the USD as it is the world’s reserve currency. The entire forex market, banking system is build around the USD as the base currency where with all other currencies are traded.
   
•  According to central bank governor Zhou Xiaochuan, he warned :
   
  warned earlier this month that settlements using the US dollar would be problematic if the dollar’s value fluctuated drastically.
   
• In other words, many countries are viewing the USD as a big risk and liability. And they are increasingly bailing out of the USD. The profligacy of the US government is alarming. The increasingly bad economic figures out of the US suggest that the US economy may be heading towards a major meltdown in early 2009. Unfortunately, many are in denial and continue to believe in the MSM’s positive spin.
   
• However, this is not the case with other nations who understand simple economics. Maurizio d’Orlando says in :  U.S. debt approaches insolvency; Chinese currency reserves at risk
   
  In the United States, the danger of debt insolvency is growing, putting at risk the currency reserves of foreign countries, China chief among them. 
   
  In 2007, 61.82% [3] of America’s public debt was held by foreign investors, most of them Asian. So the U.S. public debt held by nonresident foreigners is equal to about 109.39% (113.86%) of GDP. According to a study by the International Monetary Fund, countries with more than 60% of their public debt held by nonresident foreigners run a high risk of currency crisis and insolvency, or debt default.
   
  In the early months of next year, when the official data are published, the United States will run a serious risk of insolvency. This would involve, in the first place, a valuation crisis for the dollar. After this, the United States could face a social crisis like that in Argentina in 2001. A crisis in U.S. public debt would likely have a severe impact on the Asian countries that are the main exporters to the United States, China first among them. Chinese monetary authorities, thanks to a steeply undervalued artificial exchange rate, by about 55%, have limited imports (including food) and have achieved an export surplus. This has allowed them to accumulate a large stockpile of dollar reserves. In a currency crisis, China risks losing much of the value of its accumulated currency reserves. 
   
• The writing is on the wall for America. You can only be in denial for so long. When reality strikes home, Americans will realize that they have been let down, lied to, misled… by their own government. This is of course an understatement. The only Congressman I listen to is Ron Paul. He tells it like it is.
   
• The important point is that many countries of the world and their banks hold USD and US Treasuries. Chief amongst them are Asian exporting countries like China, Japan, South Korea, Taiwan, Singapore … Can you imagine what will happen when overnight the USD is devalued 50% or more ? All their forex and Treasuries holdings will be worthed 50% less. What if the USD totally collapses and becomes like the Zimbabwe dollar? All these trillions of USD holdings and USD denominated assets will be like toilet paper.
   
• And what about international trade? The disruption in international trade caused by a USD collapse will be immense. Because settlement of international trade is primarily in USD. This is the other main reason for China coming out to allow the Yuan to be used as settlement for trade. BEIJING, Dec. 25 (Xinhua) :
   
  In China’s neighboring countries, there were calls for the yuan to be used to settle bilateral trade payments, she said. China has signed settlement agreements with eight neighboring countries, including Russia, Mongolia, Vietnam and Myanmar, assuming a voluntarily choice of settlement currency, she added. Many were confident of the yuan and willing to settle trade payments in the Chinese currency, as it remained strong,
   
  Wu said. “China should create conditions for the yuan to become an international settlement currency,” she stressed. It is necessary to expand and deepen the yuan-denominated financial markets and step up the process to realize the full convertibility of the currency and provide investment channels for yuan holders, according to Wu.
   
• Note also the explicit statement by : Wu Xiaoling, former vice governor of the country’s central bank and now the deputy head of the financial and economic committee under the top legislature,
   
  China’s currency, Renminbi, is likely to join other international currencies to be used for forex reserves by other economies,…Prior to making the Renminbi, also called yuan, a currency used for forex reserves by other economies, it may be allowed to be used for trade settlements between China and some other countries and regions, according to Wu. In China’s neighboring countries, there were calls for the yuan to be used to settle bilateral trade payments, she said.
   
• It is quite clear that many countries are worried about the USD and prefer to have as little of it as possible. However, because it is the international reserve, trade settlement, forex currency they have little choice.  Oil is also traded in USD, so every country has to have some at least. This move by China should be seen as a pre-emptive move to divorce itself from the upcoming collapse in the USD and the Treasury market. Asian countries will increasingly dump USD and Treasuries soon, now that an alternative is in place. 
   
• The warning signs are there for the USD and Treasury : China’s forex reserves fall for first time in five years, 
   
  China’s foreign exchange reserves, the world’s largest, have fallen for the first time in five years, according to the comments of a senior forex official reported in the local media.”The forex reserves have fallen for the first time since December 2003,” Cai Qiusheng, an official at the capital account management department under the State Administration of Foreign Exchange, was quoted as saying.
   
• China realizes that it can no longer rely on the large US market for its exports. As long as there is a large trade imbalance in favor of China, the amount of USD accumulated by China has to go somewhere. And in the past it has gone into US Treasuries. Thus China is the largest creditor nation to US (about US$652B of US Treasuries). Now that the exports have dried up, there is no reason for them to continue buying US bonds. In China Says Lending to U.S. Will Not Go On Forever :
   
  BEIJING (AFP) – China warned Wednesday it would not keep lending money to the US economy indefinitely, even as new data showed it had consolidated its position as the top buyer of American government bonds.”China’s increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis,” the China Daily said in an editorial.
   
• In Japan some are openly suggesting that : Japan Should Scrap U.S. Debt; Dollar May Plummet ,
   
  Dec. 24 (Bloomberg) — Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co. The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said.
     
• Imagine writing off US$550 B ! In my opinion quite ridiculous! Japan itself is also facing an enormous national debt (100% of GDP) because of their battle with deflation and stagnation for the past 20 years. They are not that rich. But the reality of the dire situation in US is already striking home. When prominent Japanese starts to even suggest debt forgiveness for America, you know that America is in a pathetic state!

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