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LITMUS TEST FOR YUAN AS NEXT INTERNATIONAL RESERVE CURRENCY MAY BE COMING. [Copy link] 中文

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Post time 2015-4-11 06:47:44 |Display all floors
This post was edited by abramicus at 2015-4-11 07:28

THE GATHERING STORM IN THE EAST AND SOUTH CHINA SEAS

Sacrificing hundreds of billions of dollars in export earnings for three years in a row, China has made it a "NEW NORMAL" not just to have a declining though still impressive GDP growth rate that peaked at 14% five years ago to a mere 7% today, but also, and in return, the Chinese Yuan has been steadily appreciating against the world's sole international reserve currency, the dollar, for the same period of time.  No doubt, the latter has been the cause of the former, as the international demand for the Yuan cannot possibly be that high.  But, the trend is now set, and people are more than willing to accept it as a given that an investment in the Yuan is a safe store of value, and also a profitable investment, especially if you are a central bank looking for a place to park your money at.  

The purpose of currency is to serve as a dependable store of value and as a universal medium of exchange, and in peace, China seems to have achieved this, with a GDP growth rate that has remained stellar, even if not cosmic.

However, to pass the final test of an international reserve currency, China must be able to preserve the value of the yuan and continue to use it as a medium of exchange with all countries, in times of war, not elsewhere, but involving her own sovereignty and security.  Don't worry, such challenges have happened before.  But, never have the stakes been as high.  Not only would China's own sovereignty and security be at stake, but the whole regime of international currency reserves is at stake.  If China wins, and this has to be militarily, then it gets to get the crown.  If China loses, it loses everything.

This hypothetical scenario could be decades away, theoretically speaking.  But if one were watching the news, this appears rather too close for comfort.  In fact, it could unfold in a matter of a few months.  Reading the news, it appears China has not yet not reached the point where it could win any major conflict.  At best, it might salvage a truce, with concessions.  All one needs is a Tonkin Incident, such as over Diaoyudao, or now, perhaps over the Mischief Reef (name sounds more appropriate for this kind of stuff), and China may just be forced to back down, and prove that it cannot physically defend its currency, as foreign banks would quickly sell of their Yuan "reserves".  

Just as China was over-confident when it faced the smaller and less modernized Imperial Japanese Navy in the Yellow Sea, at the mouth of the Yalu River, in 1894, now 111 years later, it might still be defeated, perhaps for almost the same reasons, i.e., graft and corruption and betrayal from above.  The current administration is doing all it can to root out corruption, but has it succeeded?  The next war will tell.  Historically, and informally, one can say that the likelihood of an over-confident force losing to a numerically smaller force is about 60%, or odds of 3:2, which is really alarming, as that would be equivalent to 1.5:1.  You wouldn't play at any casino with odds that bad, even if you are a taipan.



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Post time 2015-4-16 10:32:55 |Display all floors
EVERYTHING DEPENDS ON THE CONTEXT - INCLUDING CHINA'S BID TO BE AN INTERNATIONAL RESERVE CURRENCY LIKE THE DOLLAR.

It does not really pay to be an international reserve currency, unless one's currency is the ultimate reserve currency of the world.  For years, the Japanese Yen, the British Pound, the Franc, and the Deutschmark were also international reserve currencies.  Emerging economies would store one or the other in differing quantities depending on the nature of their trading pattern, especially with one of these countries.  It is the way colonial powers retain control and ownership of the resources of their ex-colonies.  Being a reserve currency to an ex-colony means that the "mother country" that colonized it could continue to get the resources of such an ex-colony practically for free by simply printing more of the colonial currency to "buy" such minerals, produce, or manufactures of the ex-colony.  To each, his own, but to each, limited to his own.  Unlike these, the dollar could be exchanged for practically anything from any country in the world.  Its position as the Ultimate International Reserve Currency is both unique and inimitable, unless the country wishing to achieve the same status can provide the same degree of military security or support for the countries willing to accept its fiat currency for its goods and services.

China's attempt to duplicate the dollar's status as such a universal (rather than just transnational) reserve currency probably came about from two different sources.  The first is the feeling that China cannot continue to earn dollars that could simply be printed out of thin air, leading to an erosion of its purchasing power, and indirectly, but also realistically, reducing the purchasing power of China's dollar reserves, leading to a situation where China would have worked for nothing.  The second is the feeling that China could deploy its erstwhle 4 trillion dollars of reserve currency to keep up the appearance of the Yuan being equally if not more qualified as a store of value, by simply ensuring that the Yuan would appreciate against the dollar, rain or shine, at 2-5% per year, for at least 3 years in a row, regardless of whether the dollar itself was appreciating against the rest of the world's currencies.

Underappreciated were the fact that an overvalued Yuan would necessarily force the price of ALL of China's products and services to be overpriced in dollars abroad and in Yuans domestically, leading to the SURE-FIRE decimation of China's goose that laid all of China's golden egges, its manufacturing sector, as is clearly now happening, but of which China's banking authorities are in denial, that its erosion and eventual collapse could be due to something as "NOBLE" as its attempt to make the Renmnbi the next "international reserve currency" - forgetting that such a status did not save Japan, which was forced, like the Yuan right now, to become overvalued against the dollar, leading to three decades of economic stagnation and decline.

In short, all China will achieve with its "noble" and "heroic" grab for the crown of being one of the several international reserve currencies is the FATE OF JAPAN - ECONOMIC STAGNATION AND DECLINE.

In order for China to achieve the "ULTIMATE INTERNATIONAL RESERVE CURRENCY" status of the dollar, it will have to be able to militarily secure the political viability of the powers that be in all the countries that acccept its currency as its country's reserve currency, and that, China is completely in denial of its inability to achieve, except with a handful of smaller countries, that fails the definition of a "universal reserve currency".

So, when China has to pay the price of strangling its own manufacturing sector, in order to achieve the limited benefits of a Japanese-Yen-style of "reserve currency status", while missing out on the "universal reserve currency" status of the dollar by a mile, can we call that intelligent planning?  Not really.  It sounds more and more like wishful thinking, were it not also so destructive of the livelihood of more than half of its population that depends on manufacturing to survive.

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Post time 2015-4-27 18:09:34 |Display all floors
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Post time 2015-4-28 14:37:38 |Display all floors
THE FOUR TRILLON DOLLAR QUESTION STARING THE CHINESE PUBLIC IN THE FACE IS . . . WHY ARE WE KEEPING THE YUAN EXCHANGE RATE SO HIGH THAT WE:  (1) ARE LOSING BILLIONS OF OUR FOREIGN CURRENCY RESERVES BUYING UP YUANS THAT WE CAN SIMPLY PRINT FOR PENNIES, (2) ARE LOSING HUNDREDS OF BILLIONS OF EXPORT EARNINGS THAT HAVE GONE TO JAPAN INSTEAD BECAUSE OUR PRODUCTS ARE NOW OVERPRICED IN DOLLARS DUE TO THE OVERVALUED YUAN EXCHANGE RATE, (3) ARE LETTING FOREIGNERS, ESPECIALLY THE JAPANESE, REPATRIATE THEIR YUAN EARNINGS BACK HOME WITH THE HISTORICALLY HIGHEST AMOUNTS OF DOLLARS PER YUAN, COURTESY OF OUR OWN CENTRAL BANK?

IN THE MEANTIME . . . CHINA'S MANUFACTURING SECTOR IS DYING AND COLLAPSING BECAUSE IT COULD NOT SELL ITS PRODUCTS ABROAD OR DOMESTICALLY . . . CHINA'S FACTORIES ARE GOING TO HAVE TO SHUT DOWN AND DEFAULT ON THEIR LOANS, CAUSING A BANKING CRISIS FOR THE REST OF THE CHINESE ECONOMY . . . CHINA'S LABORERS ARE GOING TO BE LAID OFF, CAUSING WIDESPREAD UNREST AND SOCIAL INSTABILITY.

WHO IS THE ARCHITECT OF THIS SELF-DESTRUCTION OF CHINA'S ECONOMY FROM WITHIN?  ALL FOR GETTING THE APPROVAL OF IMF FOR THE CHINESE YUAN TO BE 6% OF THE IMF RESERVE CURRENCIES THAT ACCOUNT FOR LESS THAN 4% OF THE GLOBAL RESERVE CURRENCIES -- A MERE 0.24% OF THE TOTAL OF RESERVE CURRENCIES HELD BY BANKS GLOBALLY?

IS THIS A JOKE, A DREAM, OR REALLY, A NIGHTMARE?

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