Daily Archive: May 28, 2009

Chinas Yuan: The Next Reserve Currency? – BusinessWeek.

I’ve been reading about China’s attack, if you will, on the dollar as a reserve currency (kind of like a central currency for everyone, which can be easily converted to any other currency, and that acts as a relative “safe haven” to be kept in other countries’ central banks).  Most people say that at best the yuan is a couple of decades away from having that much clout.  The euro is way ahead of any other currency at this point and is highly convertible but is only 1/3 or so of how many transactions are done via the dollar (so currency A>dollar>currency B).  

I think part of this is simply that China is making noise about the depreciation of the dollar as the government spends like crazy.  Eventually, inflation will catch up to the stimulus (stimulus initially causes appreciation, though it’s not quite as simple as that) and all of China’s dollar-based assets will be worth less.  But it will be a few decades probably before we get out of our deficit, and at least half of one before we’re done with deficit spending (i.e. – making our deficit deeper)

As has been the case with China for decades, it remains a “paper tiger” until it puts some substance behind its words.  But when it becomes a real tiger, watch out…