Analyst and media hype on the possibility of China’s currency replacing the U.S. dollar as the world’s reserve currency was especially strong in early 2012, but then subsided. However, it appears that the topic is gaining momentum again with the World Economic Forum (WEF) discussing the subject in a release on Jan. 26.
“China’s currency, the RMB, is unlikely to internationalize in the short term,” the WEF announcement states.
The announcement speaks of China having established a special zone as a trial run to the internationalization of the RMB. No further information was provided nor any reasoning as to why the RMB would or would not become an international currency in the near future.
“China’s currency, the renminbi (RMB), will probably not supplant the U.S. dollar as the world’s reserve currency, except possibly ‘in the very long term,’” said former U.S. Treasury Secretary Lawrence Summers, according to the recent WEF announcement.
Agreeing with Summer’s assessment concerning the internationalization of the RMB, the International Monetary Fund (IMF) states in a March 2012 report that “the renminbi is unlikely to become a prominent reserve currency—let alone challenge the dollar’s dominance—unless it can be freely converted and China adopts an open capital account.”
During a recent economic forum in Hong Kong, Zhu Min, deputy managing director of the IMF, a Chinese National who has held high-level positions at the Bank of China and the People’s Bank of China, confirmed that the RMB is in the process of achieving a global reserve currency status, as reported by the Want China Times, a Taiwanese website.
Phases Required for a Rising Renminbi
For the RMB to be accepted as a reserve currency, several steps have to be taken, according to a February 2012 article on the VOX website, a site dedicated to economic policy research and analysis.
First, the currency has to achieve international status, involving the acceptability of China’s RMB in cross-border trading and financial operations. Then there has to be a free and uncontrolled inflow and outflow of liquid assets from and into China, such as money, bank accounts, stocks, or bonds. In short, the capital accounts can’t face any government or other restrictions and have to be fully market-oriented.
Finally, for the Chinese currency to become a reserve currency, it must be “held in significant amounts by governments and institutions in order to help conduct transactions in the global market,” an article on the DaveManuel.com website states.
To achieve reserve currency status, the Chinese state has to comply with factors, such as open capital accounts, a flexible exchange rate, an open market that has little or no restrictions, as well as the internationalization of its currency not governed by trade alone.
Issues that prevent the Chinese state from achieving its goal include its absolute state control over the Chinese banking sector, regulatory barriers preventing a healthy financial market development, and a tightly controlled exchange rate, according to the IMF article.
“China still comes up short when it comes to the key dimensions of financial market development, and financial system weaknesses are likely to impede its steps to heighten the currency’s international role,” the IMF article states.
Divide and Conquer Chinese Regime Style
China is taking its attempt into achieving reserve currency status a level higher, according to a Jan. 29 article on the Gains, Pains & Capital website with the headline: China Just Threatened a Currency War if the Fed Doesn’t Stop Printing [Money].
Historical annual production figures on the U.S. Department of the Treasury’s Bureau of Engraving and Printing website indicates that in 2010, 6.38 billion notes of different values were printed with the majority (1.9 billion) being $100 notes. In 2011, 5.7 billion notes were printed with the majority being $1 notes (2.9 billion). In 2012, 8.4 billion notes were printed with the majority being $100 notes (3.0 billion).
“But back to China, and its gargantuan money creation. … In other words, while everyone focuses on Uncle Ben and his measly $1 trillion in base money creation in 2013 … China will have created well more than double this amount of money in the current year alone!” a Feb. 8 article on the Zero Hedge website states.
Given the above revelation about the Chinese state’s money printing machine, the question arises: Why does the Chinese regime point fingers at U.S. money creation while keeping quiet about its own and that of other countries’ money printing efforts?
According to a Feb. 4 article on the Gains, Pains & Capital website, “Collectively, the world’s Central Banks have pumped over $10 trillion into the financial system since 2007. This money printing has resulted in a massive expansion of Central Bank balance sheets, spread inflation into the system, and done nothing to address the key solvency issues.”
Political observers and market experts state that the Chinese state’s attack on U.S. money printing efforts creates more tension between central banks. By sowing dissension among the world’s central banks, the Chinese regime could possibly angle for being awarded the world’s reserve currency status without having to address all that was required of nations that have achieved the status.
“China’s acutely aware of the yuan’s potential, which is why that nation has very carefully and methodically engineered its emergence into global markets over the past decade,” a Feb. 12 article on the Money Morning website suggests.
Unique Approach to Getting One’s Way
“Given its size and economic clout, China is adopting a unique approach, which we refer to as ‘capital account liberalisation with Chinese characteristics,’” the Vox article states.
China’s regime will move from open control over capital accounts to a combination of open and soft controls (behind-the-scenes control) by about 2017, thus becoming entrenched in the international trade forum.
A number of articles state that China will increase its gold holdings significantly to boost the value of its currency.
“The dragon nation is trying to position the yuan or renminbi as an alternative global reserve currency and large gold reserves are essential if this is to be achieved,” a Feb. 4 article on the BullionStreet website suggests.
Importance of Achieving Reserve Currency Status
“When a particular nation’s currency is the defacto reserve currency, that’s nations [sic] economic power and influence is automatically spread globally,” a Dec. 28, 2012, article on the InflationData.com website states.
Any currency that has achieved the world’s reserve currency status has immediately upon achieving the status improved in value and importance. The demand for the currency increases because the currency is used in international trade and financing activities.
In reverse, when a country loses its world’s reserve currency status, the demand will plunge and with it the value of the currency. International trade and borrowing would become more expensive, increasing the economic vulnerability of such a nation. Imports of goods and services would become more costly, reducing the disposable income of the populace.
“A loss of reserve currency status is an economic disaster for the U.S. ... If the [U.S.] reserve currency status is lost to China, the economic detriment would be compounded by the fact that the majority of American consumer goods are imported from China,” according to the InflationData.com article.
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