China’s Yuan To Challenge Dollar Much Sooner Than Previously Expected

by Kevin D. Freeman on August 31, 2011

The traditional view has been that China is an export-dependent economy that will permanently attempt to keep its currency artificially low in world markets. Thus, when most politicians accuse the Chinese of currency manipulation they assume the purpose is to weaken the yuan. They may have been right, but we believe that era is over. China has determined that the yuan should be the world’s reserve currency as we have documented previously. Their master plan includes the destruction of the U.S. Dollar as part of an overall Economic War. A CNBC article today shows the first signs of emerging awareness on this subject by the investment community.

Here are some highlights:

Here’s a bold prediction to feed Western worries that power is shifting inexorably to the East: China’s yuan could overtake the U.S. dollar as the world’s principal reserve currency as soon as next decade.

The yuan hit an all-time high in intraday trading on Tuesday, with traders predicting further gains for the rest of the year.

Beijing has been promoting the use of the yuan beyond its borders since 2009 to settle trade transactions. The resulting build-up of deposits in Hong Kong has spawned a thriving yuan bond market.

Internationalizing the yuan, also known as the renminbi, brings with it a host of financial and political benefits. Notably, it allows China to build up claims on the rest of the world in yuan rather than increasing exposure to foreign currencies, especially a dollar that it distrusts….


But the consensus has been that China, as is its wont, would tread gingerly. The ruling, risk-averse Communist Party would keep capital controls in place, thus retaining its grip over the exchange rate and interest rates but preventing the yuan from becoming a truly international currency.

Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics, a Washington think tank, sees things differently.

“Chinese economic dominance is more imminent and more broad-based—encompassing output, trade, and currency—than is currently recognized,” he writes in a new book, “Eclipse: Living in the Shadow of China’s Economic Dominance.”

Using an index of country shares in the world’s gross domestic product, trade and net exports of capital stretching back to 1870, Subramanian calculates China is already on the cusp of overtaking the U.S. as the world’s leading economy. On conservative assumptions, it will soon carve out an unassailable lead.

“By 2030, this dominance could resemble that of the United States in the 1970s and the United Kingdom around 1870. And this economic dominance will in turn elevate the renminbi to premier reserve currency status much sooner than currently expected,” he writes….


In promoting the yuan’s use overseas, China’s leaders are seizing an opportunity to gain a foothold in Asia at the expense of the United States, Europe and Japan, all weakened by the global financial crisis…

This is not happenstance. It fits with the Chinese Five-Year Plan for dominance. It also matches their plans for Economic War which have been largely ignored by American policymakers. The following quote from Chinese leadership should be sobering:

From World Affairs Journal:

China’s leading newspaper, stated it was time for Beijing to consider using its “financial weapon” against the United States.


The Communist Party’s flagship publication suggested that the Chinese government “directly link” its purchases of US Treasury debt to Taiwan arms sales and “require” ratings agencies to downgrade the United States in order to force up interest paid to China. China should also “launch limited trade sanctions” against states whose representatives in Congress support Taiwan. “China-US relations will always be constrained by these people and will continue along a roller coaster pattern if China does not beat them until they feel the pain,” the paper said.

The context for the stinging piece in the party’s self-described mouthpiece may be proposed arms sales to Taiwan, but the general message is clear: China should use its holdings of American obligations to accomplish its many geopolitical aims. “In fact, China has never wanted to use its holdings of US debt as a weapon,” the paper noted. “It is the United States that is forcing it to do so.”


The People’s Daily piece is just the latest of Beijing’s blistering attacks in the last ten days on the debt issue. The official Xinhua News Agency, for instance, issued two recent attacks on the United States. The more important of the two, on Saturday, called for international supervision over Washington’s printing of dollars and suggested consideration of a new international reserve currency to replace the greenback “to avert a catastrophe caused by any single country.”


All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved

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