World Reserve Currency
World Reserve Currency: Imagine a boxing ring for just a second. In one corner, we have the World’s Reserve Currency, the U.S. dollar. After nearly a century of fighting to keep its title, the dollar is getting a little tired, a bit soft around the middle (all that debt has to go somewhere). The dollar is world-weary, overused, over-the-hill and frankly over fighting for its position.
But that’s okay, because most currencies won’t even bother to step up into the ring to challenge the U.S. dollar.
That is until now…
Now we have another contender stepping up to challenge the dollar. And as you might expect, this prizefighter is coming from the only contender worthy of fighting the U.S. head on – China.
This scrappy contender is already making moves to take the dollar, and there’s much more at stake here than just the “World Reserve Currency” title. But more on that in just a moment.
First, why does China even deserve to duke it out with the dollar?
In the Far Corner: The Contender
You’d have to live under a rock these days to ignore how China has been steadily moving up in the Business World.
First of all, China has been posting a 7% growth over GDP for the past year and looks to continue on that trajectory. The entire Chinese Government machinery has been geared to using the massive stimulus money to build and construct infrastructure in China.
Also, let’s compare the U.S. to China for a moment.
So far, we’ve used about 8% of our promised stimulus in the last six months. China has used over 50% of their stimulus already. The implication here? While U.S. authorities are dragging their feet, promising more funds but actually implementing no change, Chinese authorities have been working double-time to fix their economy.
Also, of course China had the reserves to back up that stimulus in the first place. As my colleague, Chuck often says: China started their stimulus spending from a position of immense strength (massive reserves of over $ 2 Trillion), while the U.S. started this recession in debt. That means the U.S. can’t really afford all these stimulus programs anyway.
Also, if the U.S. tried to match the Chinese stimulus based on the size of their economies, the U.S. would need to spend about $2 Trillion. (So far, authorities have pledged $780 million).
Folks, do not get me wrong here. I am not an advocate of stimulus spending and government influence or meddling in economic policies and growth.
I do not believe that the stimulus spending will sustain economic growth in the long run. My point here is that if you truly need a stimulus package, China has had significantly better results in rebooting their economies. The Chinese also had the wealth to make that leap forward in the first place.
Will the Dollar Be the World’s Reserve Currency in Three Years?
Now let’s get back to the boxing ring for just a second…and how this whole dollar-yuan fight began in the first place.
China has been lobbying to increase the yuan’s prominence since September of last year. It all began with the swap-line agreements that we’ve been writing you about here in FX University. Chinese authorities made swap-line agreements with six different countries that effectively cut the U.S. dollar out of their international trading.
Chinese authorities have also been making small moves to undermine the U.S. dollar, as the world’s reserve currency.
I don’t see this happening this year or next year, but three years from now? That’s another matter – especially with the announcement earlier this week that blasted through China’s stealth moves and brought their efforts out into the open.
In case you missed it, China’s Vice-Premier Wang Qishan is creating a new task force to transform the yuan into a currency they can use for international trade. Right now, the yuan is still not convertible enough to be used for trade, but the day is coming. It seems the recession made Chinese authorities move their plans along even faster…that all started with those swap-line agreements last year.
My colleague and mentor, Chuck Butler had this to say about the announcement…
“See! I told you, I told you that was what China was doing when it signed those currency swap agreements with six different countries, and is currently working on ones with Brazil and Thailand! China was gaining a wider acceptance for their currency.”
Slowly but surely China was beginning to provide convertibility to the renminbi, and then and only then will it be picked up by currency dealers all around the world! It’s all happening right before our eyes folks… Don’t close your eyes, this won’t go away by closing your eyes!”
Thanks Chuck!
As I have mentioned, China is gradually taking off its gloves in the battle for world supremacy. They’re not wasting any time while the U.S. is on the mat. The count out has begun… 1,2,.3,4…. and counting.
I would continue to stay short on the U.S. Dollar and all U.S. assets.
By Ashish Advani - www.worldcurrencywatch.com
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