2012-11-05

Excellent post by Mish puts the kibosh on yuan as new reserve currency

There has been a flurry of yuan talk of late, about a new yuan-bloc of nations that are using the renminbi more than the U.S. dollar. While the renminbi continues to grow in importance and currency reforms continue to expand the use of the yuan, the facts on the ground differ from the hype. China doesn't want the yuan to be the reserve currency.

Furthermore, although Mish doesn't get into this, China's currency reform is creating structural weakness, not strength, in the short-term. Over the next few years, the risk of a currency crisis in China will rise because pent up demand for foreign assets on the part of Chinese individuals and companies will drain the central banks reserves. Any policy missteps could lead to a rush for the exits, rather than a slow and steady rebalancing of the economy.

I see yuan hype as mostly coming from U.S. dollar bearishness. People are trying to figure out what will replace the U.S. dollar. Looking at "recent" history, the two reserve currencies were the British pound and then the U.S. dollar—two major superpowers with large numbers of colonies/allied/client states around the globe. Looking ahead, odds favor a multipolar solution, which argues for gold or some type of global fiat currency as the new reserve currency.

Anyway, on to Mish:

Is the Yuan About to Replace the Dollar as the World's Reserve Currency?
Three Essential Facts

1. China's bond markets are not big enough or deep enough for the Yuan to displace the US dollar.
2. Contrary to what most think, having the reserve currency is a a curse more than a blessing.
3. Neither China nor the US wants to be the global reserve currency.

The first point alone seals the fate in my opinion but let's take a closer look at the "curse of the reserve currency".

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