A very interesting piece in Bloomberg today... very. I am not sure how China will pull this off since a moderately pegged dollar has kept their export prices low, but we're starting to see the incipient embers of China's long term plans via various perceived mouth pieces. [Jul 21, 2009: China's Plans for Replacing the Dollar]

This is going to be an interesting dynamic to watch over the next decade - as the ill behavior of the country with the reserve currency has collected calls from various nations to find alternatives. The euro seemed the natural choice but with so many moving parts, and so many countries under 1 umbrella potentially wishing for different outcomes it had not come to bear. China's yuan is not yet a freely traded instrument, so for now there has been talk of some non sovereign IMF based special drawing rights product. What has also quietly been happening behind the scenes are bilateral agreements between China and country XYZ in which the currency of use is the yuan, thereby freezing out the dollar.

From the Bloomberg piece

  • Yu Yongding, the Chinese economist whose calls for liberalizing the yuan heralded its 21 percent gain since 2005, said the government should reduce sales aimed at keeping the currency weak so it can someday float freely.
  • “Eventually, the yuan should be demanded as a reserve currency, and we are far away from this stage.”
  • The government needs to encourage more overseas investment, reduce exports and promote sales of yuan-denominated debt by foreign companies as part of a transition from managing the currency and piling up U.S. dollar assets, Yu said.
  • Solving China’s dilemma “won’t be easy,” Yu, 60, said in the Aug. 6 interview, citing a Chinese saying. “We never give up trying to cure a dying horse,” he said. “At this moment, we have to think carefully about all possible alternatives.”
  • China’s $776.4 billion in Treasuries,“are not safe, and we should be worried about that,” Yu said. The current strength of Treasuries, which returned 16 percent in two years according to a Merrill Lynch & Co. index, is ”a temporary phenomenon, because I think the U.S. economy is not healthy” and there are no alternative investment havens, he said.
  • “Why should we continue to pile up those reserves?” Yu said. Once the U.S. recovers from the deepest global recession since World War II, the dollar will weaken and Treasury prices will fall, he said. The 10-year yield of about 3.45 percent is below its five-year average of about 4.20 percent, according to data compiled by Bloomberg.
  • China’s reserves are so large that it is hard to sell the greenback without triggering a drop in its value, a dilemma Yu dubbed the “dollar trap” in April.
  • “If China can translate its trade surplus into outbound investment, then there won’t be so much pressure on the yuan to appreciate, even if the central bank stops intervening in the foreign-exchange market,” Yu said. (and we've been seeing just that)

Who is Mr. Yu aside from having a PhD from Oxford.

  • “Mr. Yu can combine theory with good understanding of China’s reality,” said Pan Xiangdong, the chief economist at Everbright Securities Co. in Beijing. “His views and comments had impact on government policies as well as investors’ choices, and his influence has never weakened.”
  • Yu’s views have received official backing before. In February, he called for China to seek guarantees that its investments in Treasuries won’t be eroded by “reckless policies.” A month later, Premier Wen Jiabao did just that during an annual session of parliament.
  • In 2005, Yu’s January call for a revaluation of the currency presaged an end to the yuan’s dollar peg that July. That October, he urged China not to “be afraid” of yuan gains, and the currency’s appreciation accelerated over the following months.
  • Yu was picked by the China Daily to grill U.S. Treasury Secretary Timothy Geithner in Beijing in June about risks that the record U.S. fiscal deficit would undermine the value of its debt. “I worry about details,” Yu told Geithner. “We will be watching you very carefully.”

Well I suppose watching you very carefully is an upgrade from we hate you. 2nd derivative improvement! Green shoot! [Feb 13, 2009: FT.com - China to US: We Hate You Guys]

On to Henry Kissinger...

  • Change in the U.S.-China political and economic relationship is inevitable, Henry Kissinger, the former secretary of state who helped re-establish ties between the two countries under President Richard Nixon, said in an interview yesterday with Bloomberg Television.
  • “I think the center of gravity of the economic world is beginning to shift towards Asia,” he said.
  • Chinese economists and leaders are beginning to feel “that the global financial system should not be determined primarily by one country,” and that “a new alternative or companion currency to the dollar would be created, built around the Chinese currency,” Kissinger said. That change won’t happen for several years because China’s currency isn’t yet convertible, he said.

Timetable?

  • Yu said he expects it will take more than five years for the yuan to become “very internationalized” and used widely for trade settlements and ultimately as a reserve currency.
  • “Internationalization is a process, piece by piece,” he said. “This will take a long time. But, step by step, we have to try our best.”

I thought it would take at least 10 years... if it's 5-7 years, then the U.S. won't have time to blow up the 2 bubbles I thought it could before it loses its sole reserve currency advantage - thus not having to make the hard decisions every other country in the throes of financial calamity had to. Maybe only 1 more bubble to go.

As I wrote in the July piece - we did get away with murder this time around...

Again, I cannot stress how remarkable this period has been as it has to be the 1 case in history where the country with the nexus of the world's problems actually benefited from all the world rushing into its currency... rather than fleeing. [World Currencies Performance in the Recession] By this happening, many tough decisions that would of had to of been made, could be kicked down the road for another (however many) years.