Chinese Yuan; A new world reserve currency? , China making its moves.

From the currency war front, we are watching the major assault on the dollar.  We have anticipated this move for several months now and it appears the major push by China has now been launched.  The first signals was China NOT buying all of the US T-Bills at the last few auctions. Then they shifted their paper buying to the Euro bills.   Now according to Graham Sharkey, only a mere twelve days into the New Year (2011) and China has already set the wheels in motion to use their most powerful weapon, the Yuan, in order to combat inflation. This may well be the first decision of many that will result in the Yuan being phased in as the new world reserve currency.

A stronger exchange rate will be the tool that China will use in order to tame their inflationary problems at present. The biggest increases being felt as a result of inflation at this time are; the Chinese housing market, which was most dramatically affected in the southern industrial hub of Guangzhou, where home prices soared by 38 percent in the past year.  Another sector heavily affected was Chinese groceries, with the cost of some foods increasing by 50 percent.

In an attempt to address the loose lending policies being adopted by Chinese banks, China’s government have ordered their banks to increase the amount of money that each bank holds in reserves with a reduction in the availability of lending.  The strengthening Yuan will essentially result in two ways; 1, their imports will become substantially cheaper. 2, their exports will be more expensive.

This is a move that the US have not wanted the Chinese to take as most of the consumer goods that are stocking up US stores are Chinese-made products and the longer the Chinese allowed their currency to be held at a relatively low-level (compared to its purchasing power potential) the longer the shopaholics’ in America could continue to buy their products at a price that they could afford (or a level that they could get credit for).  So, with the world outside China continually devaluing their currencies and China increasing theirs who is going to pick up the export market? And how do they intend to do this?

Before hand, the countries that were importing goods from China were benefiting from a manipulated Yuan price which gave the illusion of cheap imports. But now, that is not an option. The only way that I can see that will enable countries to bridge the export gap will be, further devaluation of their paper currency, which as any respecting economist knows is only an extremely short-term solution (if it can even be called that) and will only result in long-term high inflation for that economy.

This currency policy decision by the Chinese government will help to add to the increasing confidence in the Yuan as a world reserve currency contender to replace the failure that is, the US Dollar.  Aside from the measures taken to combat inflation in China, there have been many other recent events that all point to the strengthening of the Yuan and the growing popularity of the currency.

In the last two weeks, the World Bank issued their very first Yuan bonds; they will release the amount of 500 million Yuan, which is around $70 million in US Dollars. The bank has said that, these actions are an act of confidence in the Renminbi and will give investors around the globe the opportunity to diversify and help the exposure of the Yuan in global markets. The bonds were offered from January 14th, 2010 and will mature after two years in 2013.

In July of last year (2010) China began allowing cross-border exchange with the renminbi, however, there were caps on exactly how much currency was allowed to be exchanged. That was the closest China had come to allowing the renminbi to be a top currency on a global scale, until now.

Now marks the beginning of the renminbi being allowed to be traded in the U.S, China have identified that the global economy has become too reliant on the Dollar and wants to provide an opportunity to move away from that.  China have already implemented strategies that will allow for sustained appreciation for the Yuan against the US Dollar, a prediction in the rate of appreciation was projected at 6% in 2011 by Robert Minikin, who is a currency strategist at Standard Chartered based in Hong Kong.

The reason that there hasn’t been a replacement of the US Dollar as the world reserve currency as of yet is the fact that there was no currency that was ready to take on that mantle, however, given the performance of the Yuan in the last two years, it has shown its power and reliance as a solid currency, not only that, but China have also helped their cause by not relying on a paper, fiat currency but actually using the strengthening Yuan in which to buy up gold and other major assets, something that every single country in the so-called ‘advanced’ world has not done.  All of these factors are now helping to shape the Yuan into tomorrow’s new world reserve currency and once this transformation occurs, it really will spell the end for the down but not yet out, Dollar.

What to watch now is the so-called “summit meeting between President Obama and Hu Jintao of China this week.  In preparation for that meeting, President Hu Jintao said Sunday the international currency system was “a product of the past,” but it would be a long time before the yuan is accepted as an international currency.

Hu’s comments, which came ahead of a state visit to Washington on Wednesday, reflected the continuing tensions over the dollar’s role as the major reserve currency in the aftermath of the US financial crisis in 2008.

“The current international currency system is the product of the past,” Hu said in written answers to questions posed by The Wall Street Journal and the Washington Post.  Highlighting the dollar’s importance to global trade, Hu implicitly criticized the Federal Reserve’s recent decision to pump 600 billion dollars into the US economy, a move criticized as weakening the dollar at the expense of other countries’ exports.

“The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level,” Hu said.

China’s own currency, the yuan or renminbi (RMB), is also expected to be a bone of contention in Hu’s talks with Obama, with the United States complaining that it is artificially overvalued to boost Chinese exports.  Asked about the view that appreciation of the yuan would curb inflation in China, Hu suggested that was too simplistic a formula.  “Changes in exchange rate are a result of multiple factors, including the balance of international payment and market supply and demand,” he said.  “In this sense, inflation can hardly be the main factor in determining the exchange rate policy,” he said.

At the same time, Hu signalled no imminent move away from the dollar as a reserve currency, saying it would be a long time before the yuan, or renminbi (RMB), is widely accepted as an international currency.  “China has made important contribution to the world economy in terms of total economic output and trade, and the RMB has played a role in the world economic development,” he said.  “But making the RMB an international currency will be a fairly long process.”

Nevertheless, Hu noted that China has launched pilot programs using the yuan, or renminbi, in settlements of international trade and investment transactions.  “They fit in well with market demand as evidenced by the rapidly expanding scale of these transactions,” he said.

As we have chronicled in this blog, these moves are demonstrating how short the fuse really is on the Dollar remaining the world’s transactional currency.  With the European Central Bank(ECB) denying the crisis of the Euro and the US simply printing more money to cover the mess in the financial markets in the US, it is just a matter of time before China drops the hammer and we will be living in a very new economic paradigm.  Watching the currency transaction markets, it seems it is a lot closer than anyone is admitting publically.

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Further Updates from the Currency War Front

Well, folks, it’s official – mark November 22, 2010 in your calendars.  With yesterday’s $8.3 billion POMO monetization, the Fed’s official holdings of US Treasury securities now amount to $891.3 billion, which is higher than the second largest holder of US debt: China, which as of September 30 held $884 billion, and Japan, with $864 billion.  The Fed is now buying about $30 billion per week, or about $120 billion per month, for the foreseeable future and beyond, it would mean that China would need to buy a comparable amount to be in the standing. It won’t. In other words, the Ponzi operation is now complete, and the Fed’s monetization of US debt has made it not only the largest holder of such debt, but made external funding checks and balances in the guise of indirect auction bidding, irrelevant. China is now not the one having the most to lose on a DV01 basis on that day when the inevitable surge in interest rates finally happens. That honor is now strictly reserved for America’s taxpayers.

In addition, Tuesday China and Russia sent a loud message to the FED.

Source: Asia One – Su Qiang and Li Xiaokun

St. Petersburg, Russia – China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.  Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.

“About trade settlement, we have decided to use our own currencies,” Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities. The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.

“That has forged an important step in bilateral trade and it is a result of the consolidated financial systems of world countries,” he said.

Putin made his remarks after a meeting with Wen. They also officiated at a signing ceremony for 12 documents, including energy cooperation.  The documents covered cooperation on aviation, railroad construction, customs, protecting intellectual property, culture and a joint communique. Details of the documents have yet to be released.

Wen said Beijing is willing to boost cooperation with Moscow in Northeast Asia, Central Asia and the Asia-Pacific region, as well as in major international organizations and on mechanisms in pursuit of a “fair and reasonable new order” in international politics and the economy.

Sun Zhuangzhi, a senior researcher in Central Asian studies at the Chinese Academy of Social Sciences, said the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.  Wen arrived in the northern Russian city on Monday evening for a regular meeting between Chinese and Russian heads of government.

In related news on the situation in the EU comes the grim but expected news that the Spanish 3-month bill auction failed.  The debt agency sold only €3.26bn of the €4-5bn that was offered, at average yield of 1.743% vs 0.951% prior. What people must understand is that is nearly double the interest rate.  This debt service is the back breaker to the economy.  Tensions are surely going to start boiling over on the Emerald Isle.  If Greece was a big bomb to the EU and ECB stability, and Ireland was Greece’s big brother, then the Spanish economy is their bigger brother Bubba.  These three countries WILL require further bailouts and quite frankly more than the ECB can handle.  The death of the EU is like watching a shot buffalo go down in a Sam Peckinpah movie.

Finally, back in the US, in addition to the impacts of QE2, the mortgage situation as related to the big banks is far from going away.  To put things in clear perspective, the banks bundled, and sold to investors, junk paper consisting of bundled questionable mortgages.  In most cases, those same banks kept the seconds on those mortgages.  However, now the investors do have recourse.  These bundled packages required the banks to “buy back” any equity that was in default or foreclosure.  The bottom line to this is that the top five banks, between the bad second mortgages and the default clauses on the crap they dumped on investors, are on the hook for nearly $400 Billion, which is more than the equity value of those top five banks.

In view of the fact the currency wars have unquestionably erupted, these elements represent the perfect storm.  As a side, the “fear” index on Wall Street today was the highest recorded since 1987.  These events are moving along the worst case scenario lines.  Watch very carefully.

Update From the Currency Warfront

As we have discussed in previous articles, our fears relating to the lack of political will or statesmanship are seemingly coming true. Our global leaders seem to be struggling at the G20 summit when it comes to the subject of currency imbalances.

Consider these facts reported by the Telegraph UK …..With China resolutely refusing to allow the yuan to rise more quickly, the US shifted the debate on the first day of the G20 summit to address trade imbalances, the root issue behind exchange rate clashes.

Timothy Geithner, the US Treasury secretary, told G20 members they should commit to specific trade caps, allowing surpluses and deficits on their current account, the broadest measure of trade in goods and services, to be no more than 4pc of gross domestic product.

China’s current account surplus was 5.9pc in 2009, having almost halved from its peak of 10.6pc in 2007. The US, by contrast, had a current account deficit of 3pc last year.  In a letter to the G20, Mr Geithner called for a “co-operative effort” on the issue, but said there would have to be “some exceptions” for countries that imported large quantities of raw materials.

The US plan was seen as a way to side-step a direct confrontation over currencies. It was backed by the UK, Korea, Australia and Canada, but immediately opposed by large exporters such as Japan and Germany.  Rainer Bruederle, the German finance minister, rejected a “command economy” approach, while Yoshihiko Noda of Japan said “setting numerical targets would be unrealistic”.

India also said the trade caps would be hard to work out, while Russia said there would be no numerical limits set in the summit’s final statement.  Mr Geithner also called for G20 countries to refrain from “either weakening their currency or preventing the appreciation of an undervalued currency”. Mr Geithner, who also called for the IMF to monitor the G20’s commitments, added: “G20 advanced countries will work to ensure against excessive volatility and disorderly movement in exchange rates.”

Guido Mantega, the Brazilian Finance minister, who was not at the G20 summit, also revealed the Mr Geithner had telephoned him to reassure him that the US had no intention of allowing the dollar to weaken further.  “He guaranteed US policy is not to weaken the dollar, on the contrary, it is to strengthen the dollar,” said Mr Mantega. “He said the impact of the Fed policy was being overestimated. It is difficult, if you weaken the dollar and want the Chinese to let the yuan appreciate,” he added.

However, as the first day of meetings closed, there was little sign that currency issues would be resolved. With scepticism growing that the G20 was a focused enough forum to iron out global economic problems, Lee Myung-bak, the South Korean president who is hosting the summit, warned ministers that if they did not reach a compromise “we may not operate bus, train or airplane services to take you back home”.

In a final statement after two days of heated negotiation, the G20 said it would “move towards more market-determined exchange rate systems” and that the International Monetary Fund would “deepen” its supervision of exchange rates.

“This language calms everything down and gives us a route map forward,” said George Osborne, the Chancellor of the Exchequer. “Obviously this colorful language about currency wars has got everyone excited,” he added.

Mr. Osborne clarified, however, that the statement was not a criticism of China for persistently undervaluing the Yuan. “What people have been nervous about is that the current imbalance would get worse as countries other than China look at the route of competitive devaluation.” He also said that while currencies “tend to grab the headlines”, they are just one part of wider economic imbalances.

While several member countries of the G20 hailed the summit in South Korea as a success, Japan immediately broke ranks to declare that, contrary to the spirit of the communique, it would continue to devalue the yen if it saw fit.  Yoshihiko Noda, Japan’s finance minister, said: “A prolonged appreciation in the yen is not good for Japan’s economy. Our stance, that we will take appropriate, bold action if needed, is unchanged.”

From all of this, the thing we need to fear the most is an outbreak of currency devaluation to counterbalance China’s refusal to let the Yuan finds its place in the market.  This could have disastrous effects on already stressed economies.

While a little inflation and growth would be a good thing, hyperinflation would be devastating to the US and EU economies that are at best still on their knees.  Relate this also to the fact that most of these nations have committed to rather severe austerity programs and the temperature in the pot will go up a few degrees I fear.

It is no secret that for months now that predictive linguistics has pointed to a major event that has been anticipated within the first 15 days of November.  Most recently, it seems to somewhat focus on the global economy.  PAY ATTENTION, very close attention to these events now unfolding.

Here Comes the Currency Wars! Is It What Kicks Off the Final Crash?

Regardless of all of the happy talk, I have continued to insist that firstly, this is the second great depression.  It is definitely global and extended. Secondly, we haven’t seen the bottom yet and I believe we will be dealing with this economic crisis for at least another 5-10 years.  I have contended that the real numbers and facts that count have NOT improved and to say the recovery has begun and more outrageous to say that it started in June of last year is mind-boggling.

There is no more vulnerable area to precipitating the “second leg” down than a global currency war.  The impacts of such wars are never anything good for struggling economies.  It seems that is exactly what is beginning to happen.  Consider this from Peter Simpson in Beijing for VOAnews.com

http://www.voanews.com/english/news/China-Warns-US-Yuan-Bill-Could-Damage-Ties-104071274.html

China Thursday expressed its anger at legislation in the United States aimed at punishing Beijing for not letting its currency rise in value and failing to address trade imbalances.  Foreign Ministry spokeswoman Jiang Yu says the United States should avoid steps that could damage relations. She says her government opposes what she says is Congress using the currency issue to launch protectionist measures against China.

On Wednesday, the U.S. House of Representatives passed legislation that would allow Washington to treat what the bill describes as fundamentally undervalued currencies as an illegal export subsidy.  Jiang says the bill would harm commercial relations between China and the U.S., and says it could affect the economies of both countries, and the world.

The bill is primarily aimed at China. The U.S. and other countries say it keeps its currency, the yuan, artificially low to give its exports an unfair advantage. Many U.S. politicians, businesses and labor groups say this has contributed to the United States’ massive trade deficit with China. Congress says the deficit causes jobs losses in the U.S.  The bill would allow the U.S. to set tariffs to offset China’s price advantages.

It must be passed by the Senate and signed by President Barack Obama to become law, and neither is certain. But the latest move has rattled China.  State media quoted the Commerce Ministry as saying the bill contravenes World Trade Organization rules.  Jiang, the Foreign Ministry spokeswoman, would not say if Beijing will seek to retaliate.  But Beijing is not alone in its opposition to the bill.


The American Chamber of Commerce in China on Thursday said the bill would not achieve its objectives and would not create significant U.S. job growth.  Chairman John Watkins Jr. says the group opposes the bill because it will make the trade deficit worse, and will likely shift some China production to other low-cost countries.

“We believe that it will actually reduce exports and thereby good jobs,” Watkins says. “I think it will add further tension to the U.S.-China relationship. We think that Congress would be better focused and better advised coming up with a response to deal with China’s web of indigenous innovation policies, weak intellectual property protection, and tightening market access for foreign firms here.”  Any vote on the bill in the U.S. Senate will not come until after congressional elections on November 2.

If this was the only issue, it may be manageable, but the focus is just not on the US and China, although these countries are 1 and 2 respectfully economically.  There is a great concern on how the EU is going to manage its joint austerity programs.

Russian President Dmitri Medvedev has urged the European Union to stabilize its common currency, saying a stable euro is important for EU trade partners, including Russia. Mr. Medvedev told reporters in Germany Saturday that Russia is not indifferent to the fate of the European single currency, because it keeps part of its foreign currency reserves in euros.

The Russian president arrived in Germany Friday to discuss global and bilateral issues with German Chancellor Angela Merkel.   After speaking with the German leader, Mr. Medvedev expressed confidence that a package of EU measures put in place to help stabilize the euro will work.  Later this month, leaders from top 20 economies will meet in Canada to discuss ways of stabilizing the world economy and financial system.

This comes at the same time as we are seeing the working classes of the EU countries most affected take to the streets en masse.  Workers across Europe took part in coordinated actions to protest government austerity measures, shutting down much transport in Spain and filling the streets of Brussels with tens of thousands of marchers.

Spain’s first general strike in eight years left few buses running in Madrid and about half of underground trains out of service, Reuters said. The government said an agreement with unions guaranteed minimum service. Sky News reported that Iberia, Spain’s largest airline, expected only a third of its scheduled flights to take place.  Unions claimed that more than half of the Spanish work force, or about 10 million people, were on strike, Reuters reported, though the government downplayed any problems.  “So far the strike is taking place with normality and without incidents,” said Celestino Corbacho, the Spanish labor minister, The New York Times reported. “Citizens are fulfilling both their right to strike and work.”

The day of labor action across Europe was led by the European Trade Union Confederation. The group represents trade unions from 36 European countries and claims 60 million members, CNN reported.  “Cutting in a recession is crazy, and we must fight it,” John Monks, European Trade Union Confederation’s general secretary, told CNN.  In Brussels, union organizers said they had achieved their goal of drawing 100,000 people to march on European Union buildings, The Associated Press reported. Union workers are rallying against higher taxes, a delayed retirement age and longer work day, the Times said.

In Greece, which has been trying to fight off bankruptcy, some transportation workers had walked off the job, national rail workers were stopping work later, and hospital doctors were on strike for 24 hours, AP reported.


Irish police arrested a 41-year-old man after he drove a cement-mixer emblazoned with the words “toxic bank” to the gates of the Irish parliament in Dublin, which is due to authorize billions of dollars of further funding to bolster Anglo Irish Bank, which was nationalized last year. Authorities took more than two hours to remove the truck, according to the Irish Times, because the protester had taken measures to immobilize it.  CNN said protests are also planned in Portugal, Italy, Latvia, Lithuania, the Czech Republic, Cyprus, Serbia, Romania, Poland, Ireland and France.

Although the UK seems aloof from the EU, it cannot escape the reality of mandatory “austerity” measures, but like the US the new government seems reluctant to tell the public the truth of the nature and depth of the austerity programs.  The point of all of this is that we are not immune from these wars and in fact we are already engaged fully in the “prosecution” of this war.  I, for one, am very concerned that these tensions will build and the resultant tariff wars that will be imposed because of a lack of response from country X or Y to valuation demands will set off hyperinflation and more unemployment globally.  This may well be the biggest story of the year and few media outlets are putting in front of us.  Hmmmmmmmmm.