Yuan Likely Convertible in Five Years

by Kevin D. Freeman on September 15, 2011

There’s no question that the dollar is the primary reserve currency. There should also be no question that this will not remain so forever. In fact, trends are accelerating faster than previously imagined that will result in reserve alternatives.

One of the trends we have outlined quite recently is the potential full integration of Europe. The pressure to offer Euro bonds is significant and increasing daily. We have outlines this as The Soros Solution.  This approach was reinforced in a CNBC article today titled: EU’s Barrosso Will Soon Present Options On Euro Bonds.

Another trend is the acceleration of the Yuan as a global currency. Here are quotes from another CNBC article today:

Yuan Likely to Be Fully Convertible in 5 Years: PBOC Advisor



| 14 Sep 2011 | 05:27 AM ET

A senior advisor to the People’s Bank of China said China’s currency will be fully convertible in the next 5 years as long as there is no major shock to the economy. Li Daokui dismissed suggestions that freely floating the yuan will hurt China’s exports and its economy.

“With a fully convertible currency there will be both inflows and outflows of currency. So currently there is a great, great potential for our households and enterprises to get our foreign currency reserves and go out and invest abroad,” Daokui said Wednesday at the summer meeting of the World Economic Forum in Dalian.

Daokui said China was looking at both yuan convertibility and liberalization of interest rates as part of a bundle of reforms. He said the next step in the liberalization agenda would be to free up the amount of foreign currency Chinese households and businesses can get access to.

China’s currency is freely convertible on the current account (for trade purposes), but is tightly controlled when it comes to the capital account (for investments).

Allowing Chinese businesses and investors to convert more money to dollars and euros could ease China’s worries about what to do with its nearly $3.2 trillion in foreign exchange reserves. It could also boost the global economy as more Chinese invested and consumed goods and services abroad.

Li, an academic who teaches at China’s Tsinghua University, was appointed to the central bank’s monetary policy committee in March 2010 and is seen as a reformer.

Talk of full yuan convertibility picked up last week after Davide Cucino, the head of the EU Chamber of Commerce in China said Chinese officials had told EU business executives that they planned to freely float the yuan by 2015.

The fact that our dollar has been reserve currency has been the primary saving grace since the 2008 financial crisis. Without it, our domestic interest rates would be much higher, dramatically increasing the problem of our very large Federal Debt. It is important to understand how quickly a problem can emerge and precisely how it can weaken a nation. A perfect example is that Greece was paying less than 1.5% for two-year debt as recently as November 2009. The rate has skyrocketted to nearly 85% recently. The Chinese have offered to help with the Euro Crisis but their help comes with a price as acknowledged in a third CNBC article today:

China’s Wen Promises More Support for Europe, Hints at Price



| 14 Sep 2011 | 12:45 AM ET

China’s premier, Wen Jiabao, said the country remains ready to help Europe through its current debt crisis, but said Europe must recognize China as a full market economy.

Addressing CEOs and policymakers at the summer World Economic Forum in Dalian, China, Wen said he had told European Commission President Jose Manuel Barroso on a recent phone call that China was willing to invest more money in the region.

But he urged the EU to grant China the status of a full market economy before the World Trade Organization (WTO) does so in 2016.

“Recognizing China as a full market economy is a way a friend recognizes a friend,” Wen said.

Market economy status would help Chinese products get better treatment in trade disputes with Europe.

The bottom line is that the news continues to provide reason for continuing concern regarding global economic warfare issues.

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

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