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Page added on April 9, 2014
40 Central Banks Are Betting the Yuan Will Be The Next Reserve Currency
As we have discussed numerous times, nothing lasts forever – especially reserve currencies – no matter how much one hopes that the status-quo remains so, in the end the exuberant previlege is extorted just one too many times. Headline after headlines shows nations declaring ‘interest’ or direct discussions in diversifying away from the US dollar… and as SCMP reports, Standard Chartered notes that at least 40 central banks have invested in the Yuan and several more are preparing to do so. The trend is occurring across both emerging markets and developed nation central banks diversifiying into ‘other currencies’ and “a great number of central banks are in the process of adding yuan to their portfolios.” Perhaps most ominously, for king dollar, is the former-IMF manager’s warning that “The Yuan may become a de facto reserve currency before it is fully convertible.”
The infamous chart that shows nothing lasts forever…
Nothing lasts forever… (especially in light of China’s recent comments)
As The South China Morning Post reports, Jukka Pihlman, Standard Chartered’s Singapore-based global head of central banks and sovereign wealth funds (who formerly worked at the International Monetary Fund advising central banks on asset-management issues), notes that:
At least 40 central banks have invested in the yuan and several others are preparing to do so, putting the mainland currency on the path to reserve status even before full convertibility
The US dollar remains in charge (for now)…but
The US dollar is still the world’s most widely held reserve currency, accounting for nearly 33 per cent of global foreign exchange holdings at the end of last year, according to IMF data. That ratio has been declining since 2000, when 55 per cent of the world’s reserves were denominated in US dollars.
The IMF does not disclose the percentage of reserves held in yuan, but the emerging market countries’ share of reserves in “other currencies” has increased by almost 400 per cent since 2003, while that of developed nations grew 200 per cent, according to IMF data.
As SCMP goes on to note, the rising popularity of the yuan among central bankers is probably mainly due to Beijing’s extremely favourable treatment of them as it has sought to encourage investment in the yuan.
For example, central banks enjoy preferential treatment in the qualified foreign institutional investor category, both on the size of the quota and the length of the lock-up period. The QFII quotas given to central banks are not publicly known, but some of those announced by investing central banks are up to 10 times larger than others in the programme and, most importantly, free of any capital controls.
“Central banks and sovereign funds have special treatment,” Pihlman said. “They have the ability to invest in a way that any other investor does not have. When it comes to convertibility, there is nothing formally out there, but it is fully convertible.”
As Pihlman explains, things are accelerating…
Pihlman said “a great number of central banks are in the process of adding [yuan] to their portfolios”.
“The [yuan] has effectively already become a de facto reserve currency because so many central banks have already invested in it,” he said. “The [yuan] may become a de facto reserve currency before it is fully convertible.”
The central banks more likely to add yuan holdings in the future were the ones with “strong trade linkages to China” and those which had relatively large levels of reserves which could consider diversifying more for return-related reasons, he said.
“The [yuan’s] convertibility may be already there for central banks in a way that has got them comfortable to start investing in the currency,” Pihlman said.
We leave it to a former World Bank chief economist, Justin Yifu Lin, to sum it all up…
“the dominance of the greenback is the root cause of global financial and economic crises,”
It appears the world is beginning to listen
15 Comments on "40 Central Banks Are Betting the Yuan Will Be The Next Reserve Currency"
Davy, Hermann, MO on Wed, 9th Apr 2014 12:39 pm
This is a reprinted article on Zero Hedge from a few months ago and nothing new. These ideas have been around a while. You don’t hear much out of China these days on this issue because China is in a debt unwind and is in no position to do anything other than contain the their own contagion. A contagion that will have global ramifications. In reading this article you will see it mentioned that serious discussions will be needed by the world’s largest economies. Tell me folks with this new cold war with Russia brewing do you think we are going to have a significant discussion on a new reserve currency…’NO’. I am not saying good or bad with a global “super” currency. A “super” global currency is in many ways needed in some form to limit volatility and financial contagions. We do not need another “Minsky Moment” like the Lehman event. Yet, the world has become so hyper-complex that the ability even of a new “Super” global currency to prevent the spread of contagions and financial events is limited. The fact that we have so much debt, leverage, shadow banking, collateral rehypothecation, and Central bank financial repression cannot prevent dangerous swings in the financial environment. With all local environments directly or indirectly dependent on the global we are in a predicament of change. Any change may have unintended consequences leading to the very danger that change tries to eliminate. We are truly on a train ready to jump the tracks.
Arthur on Wed, 9th Apr 2014 12:39 pm
40 Central Banks Are Betting the Yuan Will Be The Next Reserve Currency
Wrong.
There is not going to be a next old skool reserve currency, because there will be no move towards further globalism. The reserve currencies of the past (Portugal, Spain, Holland, France, Britain, USA) coincided with the 6 centuries of the modern era, beginning with the Renaissance, an era of continued expansion, the era of the white man. The Portuguese were the first to explore the entire globe, one century before the Spanish, Dutch and British did likewise. With every passing decade new resources were discovered, new colonies added to expanding empires.
But now we are arriving at the end of the modern era. Material expansion is over. Globalism will be put in the reverse gear (unless somebody gets nuclear fusion working efficiently). What will put an end to the idea of reserve currency is lack of trust, lack of faith in continued expansion, lack of faith in the trustworthiness of paper IOYs. The future is to barter. And if that is not possible, gold, silver or platinum will do fine as well.
Sorry China.
bobinget on Wed, 9th Apr 2014 1:35 pm
“the dominance of the greenback is the root cause of global financial and economic crises,”
“It appears the world is beginning to listen”
These statements are foolish and self contradictory.
To state USD as villain is to ignore environmental degradation, globalism, at least four wars in progress,
and of course, commodity pricing.
When the UN released its Climate Change report two weeks ago, few paid any attention. After all, there’s still time for a fifth war.
Boat on Wed, 9th Apr 2014 5:34 pm
The worlds 2nd and 3rd largest economies are arguing about rocks in the china sea and visiting memorial gravesites from WWII.
#2 feeds the survival of N Korea. That is quite a track record for a country that would be the next reserve currency.
As the US retreats from the rest of the world China will be good at world peace and protection the worlds flow of oil.
Oh, I forgot they need to keep the ships at home unless Japan attacks.
DC on Wed, 9th Apr 2014 7:14 pm
If history is any guide, why would anyone believe Currency X as world reserve would be any better than the current one? To be sure, China would likely be nowhere near as brutal and reckless if it took the dollars place-but that really doesn’t mean much at the end of the day. The larger idea of ‘reserve’ currencies is flawed. All ‘reserve’ currencies have their day in the sun-then fade away, and the cycle tries to repeat itself with a shiny new coat of paint somewhere else. For what purpose-and whose? Even China itself has said it prefers a basket of currencies in international trade. It has directly repudiated the idea of the ‘Yuan’ replacing the USD’s current role. If even China sees the problem, I am sure even the amerikans @ Zero IQ can to….
Stilgar Wilcox on Wed, 9th Apr 2014 7:14 pm
Whether the US can retain the reserve currency status of the USD will be determined by what happens, as in how much more debt will we pile on acting like we are a wealthier country than we are, and how much longer QE will need to be implemented to spur this supposed recovery.
We will see if the Fed can in fact taper QE to zero and what will happen to the economy when that occurs.
All the recent talk of the perilous position of the USD is simply due to a situation of 17.5T in debt and rising, coupled with 4+T in Fed debt from QE. It’s easy to take out loans and print money, but what it would take to stop the debt from rising and to stop QE seem daunting, let alone paying them down in a world with higher energy costs and reduced manufacturing.
Meanwhile China is accumulating gold and working with Russia and other countries to use other currencies when exchanging goods, like oil. It’s a trend of the US fiscal strength weakening while China continues to ascend. Sure, China has problems but as much as people keep predicting their demise they somehow just keep getting about 7% growth while we tread water.
It’s a trend, and eventually that trend will lead to the USD not being the reserve currency. That is unless the US changes course. Anyone see that happening? Please, I’d love to hear a theory about how that happens when on capitol hill they can’t agree on much of anything.
Arthur on Wed, 9th Apr 2014 7:56 pm
Just listened to good ‘ol PCR. He said, like many before him, that the SHTF on the very moment the west is no longer able to deliver real gold for recycled dollars:
http://usawatchdog.com/gold-us-dollar-fight-to-the-death-paul-craig-roberts/
(Maybe interesting for Greg to listen to PCR in order to get rid of the idea that ‘they’ are winning; they’re not).
That will be the moment that the dollar will no longer be accepted by trading partners, first and foremost China and Russia. That will be the moment when China will make get serious about their long-announced ‘de-Americanizing the world’, meaning stripping the dollar of reserve currency status. After that: trading fine, but real values only, not IOYs like fiat money. China already has too many dollars and is no longer interested in increasing that amount of IOYs. According to PCR the real pain is going to be felt by American consumers when prices for imported goods will go through the roof.
Positive trade balance:
1. Saudi Arabia 252.756
2. Germany 219.938
3. Russia 198.760
4. China 155.142
5. UAE 80.000
6. Kuwait 72.800
7. Qatar 72.000
8. Norway 67.982
9. Nigeria 64.000
10.Netherlands 63.145
Negative trade balance:
1. USA -784.775
2. UK -162.973
3. India -154.401
4. France -117.676
5. Turkey -105.862
6. Spain -64.691
7. Hong Kong -55.630
8. Italy -33.872
9. Japan -31.593
10.Egypt -28.375
Source: wiki “List of sovereign states by current account balance”
If you strip the raw materials suppliers from the positive list, you see immediately who are the real powerhouses on this planet, and hence who are going to define the geopolitical centers of gravity in this for the rest declining century.
PrestonSturges on Wed, 9th Apr 2014 9:32 pm
Just looking at the headline, I knew this was gonna be more garbage from zerohedge.
sparky on Thu, 10th Apr 2014 12:20 am
.
Some confusion there
China has been keen to set up Bilateral trade deal with it’s biggest commodities trading partners
and has a very open door policy on those countries currencies .
to some degree it by pass the US dollar as a trading currency , but not as a reference benchmark
Makati1 on Thu, 10th Apr 2014 12:28 am
Well, There are those who poopoo this article, but the IMF has the new currency already in use. It called Drawing Rights. It will likely be the new trade currency that replaces the dollar as it is already there. All they have to do is tie it to a basket of currencies, and maybe gold, and away it goes.
Instead of oil being $100 a barrel, maybe it will be 20 DRs a barrel. Then any country buying oil can just work through the IMF instead of the BIS where there is a profit skimmed from every transaction. There has been a lot of articles lately showing that the time is fast coming when the USD will be relegated to the toilet paper it really is. This Ukraine fiasco is only pushing it faster and faster to that end. The world is getting tired of the Us dictatorship.
Davy, Hermann, MO on Thu, 10th Apr 2014 1:22 am
Art, I find it strange a country like China that depends on the US for a significant portion of its food would try to cripple it? Art, do you realize why China has so many dollars. China is running an export economy so it must take dollars to keep its currency from appreciating. If it appreciates too far there goes its competitiveness and its 7% growth. The best thing that could happen for the US is to take less imports. If the US takes less imports we can produce more at home creating jobs that have been outsourced. Also your view that imports will go through the roof for Americans and not for the rest of the globe is disjointed. Trade is a two way street Art. Do you think trading partners want to lose markets? Maybe the Dutch don’t care. Trade balances are a poor way to compare countries. Unless you get more detailed about the positives and negatives of each country you are not telling a story.
Art said – If you strip the raw materials suppliers from the positive list, you see immediately who are the real powerhouses on this planet, and hence who are going to define the geopolitical centers of gravity in this for the rest declining century.
Come on Art, do you really think those countries you named are going to be powerhouses just because of a positive trade balance?????. I notice you included your own out of pride no doubt. I am not seeing a line of thought here Art. Please try again.
Makati1 on Thu, 10th Apr 2014 2:47 am
The Us is buying it’s necessities with borrowed money. Borrowed from that same country you claim is reliant on US purchases…lol. Don’t you think they are smart enough to see that they are being paid with debt? Worthless monopoly money? Don’t you think they are building new and bigger customers in other countries? That they have been for at least a decade?
No, China is about to step away from the US in more ways than markets. Trade in the currency of the purchasing country instead of USDs is a fast growing phenomenon. China is setting up the system needed to replace the dollar in Europe, Asia, and, I am sure, in South America. When 90% of the world trades with you, the other 10% is insignificant. Especially if it is on the verge of bankruptcy. The Chinese and Russians are not fools. They are for China and Russia and make their decisions accordingly.
Makati1 on Thu, 10th Apr 2014 2:51 am
As for Russia. If it was so powerless, why is the Us afraid of it? Ditto China?
Is it because these two powers are real powers and not 3rd world banana republics? That they are able to stop the advance of the empire and world domination? That they have the ability to bring down the rabid dog in the North American hemisphere anytime they desire?
I love to see a bully get his just deserts.
Makati1 on Thu, 10th Apr 2014 3:07 am
BTW:
“Among the net importers of food we find countries such as Russia, Finland, Sweden, the UK, Italy, Germany, Portugal, Sudan, Cuba, Saudi Arabia, Japan, etc. The largest net food importer is Eritrea, with $0.01 of food exports per every $1.00 of food imports. Eritrea is closely followed by Venezuela, Turkmenistan, and Algeria.”
Funny, I don’t see China as a NET importer of food. Could it be that they also export, just as the US and their imports are luxury or out of season stuff like the US?
http://www.indexmundi.com/blog/index.php/2013/02/19/food-exports-and-imports-worldwide
Seems to me that the US buys $300B more per year from China then the Chinese buy from us. Who needs whom?
http://www.census.gov/foreign-trade/balance/c5700.html
We also buy $15B more from Russia than Russia buys from the US.
Arthur on Thu, 10th Apr 2014 8:05 am
Art, I find it strange a country like China that depends on the US for a significant portion of its food would try to cripple it?
They don’t want to ‘cripple’ America. All they want is ‘real values’ for their products. Green paper is not seen as real values, because they already have an excessive amount of that stuff to the tune that they correctly fear that they will never see ‘real values’ in return for that mountain of green paper ($3T). China does not want war with the US, but wants to trade with the US ad infinitum, but only on a bases of reciprocity.
Can’t blame them.
The best thing that could happen for the US is to take less imports. If the US takes less imports we can produce more at home creating jobs that have been outsourced.
Yes, but the downside is you actually have to work for it and be content with considerable less real income. Simply printing money is much more comfortable, as any bank robber can confirm, who is not yet in jail and is having a good time with the loot. But I agree, in the long run it is much healthier for the US after the financial crash to close it’s borders and recover it’s industry, all within the new confinements of resource depletion, that applies to all of us.