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Is the Chinese Yuan set to replace the US dollar?

May 10, 2013

In this issue:
» Tokyo has the most number of millionaires
» The terrible results of Japan's monetary experiment
» US' jobs market has problems
» FY14 to be a better year for Indian exports?
» ...and more!

In the aftermath of the global financial crisis, the status of the US dollar as the world's reserve currency has increasingly come into question. Reckless money printing practices by the US Fed has undermined the value of the dollar as many countries have looked to diversify their assets into other currencies.

The question then remains is which currency can take over from the US? Despite the crippling debt and weak fundamentals in the US, one of the reasons why the dollar still continues to find weight is because other countries have their share of issues as well. And so the dollar's strength is more relative. But there have been talks that the Chinese currency Yuan can stake a claim to the mantle currently donned by the dollar.

One of the reasons why this seems likely is the tremendous pace at which China has grown in the recent past and become a force to reckon with in the international arena. Further, as per an article in Firstpost, if China eventually opens its capital market in the next 5 years, its progress as an international currency will be ensured. It will have big implications in countries around the world including India whose ambitions to become fully convertible on the capital account appear a dream at best.

But all is not hunky dory for the dragon nation. One of the reasons why the US dollar is said to be losing value is because of the massive debt that the country has amassed. And in this regard, China does not fare well either. Indeed, as per the article, China has resorted to debt to fuel growth as a result of which the current level of debt stands at around 205% of GDP. What is more, More than half of that debt was piled on in just the past four years since the 2008 global financial crisis. Further, China will have to ease its capital controls; something which the very structure of its political system may not allow to happen.

So as far as paper currencies go, it appears that the US dollar will enjoy dominance for some more time to come. But given the kind of economic problems most countries across the world including the US are facing, maybe the right question to ask is whether paper currencies as a whole will lose relevance in the distant future?

Do you think that the Chinese Yuan will replace the US dollar as the world's reserve currency down the line? Please share your comments or post them on our Facebook page / Google+ page

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 Chart of the day
Japan's economy has been stagnant for many years now, but its capital Tokyo can boast of having the most number of millionaires. As per the Economist, the city, which boasts 460,700 individuals with net assets of US$ 1 m or more (excluding their primary residences), is home to over a fifth of Japan's millionaires. China does not do badly either as Beijing is ranked sixth. What is interesting is that no Indian city figured anywhere in the list of top 20 cities having the most millionaires. But the country has made a mark when it comes to the number of billionaires. Is this then another indicator of income inequality in the country?

*in 2012
Data Source: The Economist

A successful hedge funder named Kyle Bass has been a bear on Japan for as long as we can remember. And he made it pretty clear in a recent investment conference that there was no love lost. As per Bass, what Japan is doing represents 70% of what the Fed is doing with an economy 1/3rd the size of US. And thus if one is worried about the terrible consequences of US monetary experiment, one can only imagine how vulnerable Japan is. That's not all. Japan also has the highest debt to GDP ratio amongst the developed nations and suffers from a decline in population. Hence, all these factors put together present a ticking time bomb for the country, feels Bass. We have to say that Mr Bass does have a strong reason to be negative on Japan. When everything else has failed, Japan has embarked on this huge monetary experiment. But as the example of Zimbabwe and many others suggest, one can never print one's way to prosperity. And the longer one keeps printing, the bigger is the size of the eventual crisis.

The Wall Street, President Obama and his cabinet of Ministers and economists may buy this argument. But not everyone believes that the so-called recovery in US jobs scenario will bring in better times for global economy. The US jobs data is no reason to cheer for common citizens of America. After all, the unemployment numbers that were at 4 year lows in April 2013 are very misleading. As per an article in Bloomberg, just 58.6 % of Americans aged 16 and above were employed in April 2013. This data from the Bureau of Labor Statistics, shows that the employment-to-population ratio is currently lower than that during the worst of the 2007-09 recession.

Then why is it not showing in the numbers? Even though the jobless rate in the US has fallen, millions of people are not counted as unemployed. This is because they've stopped looking for work, or never started. In addition, the US is also facing the problem of shortage of skilled workers to fill up vacancies. Thus, while the US stock markets may be taking cues from economic statistics, the ground reality is quite different. Sufficient proof that Bernanke and company have completely failed in creating jobs with excess liquidity.

Over the last several months, most parliamentary sessions have been a failure. Controversies over a slew of corruption scams have created a political deadlock between the ruling UPA government and the Opposition. As a result, several bills that were announced are waiting to be passed.

Take the Food Security Bill. The government had announced this bill about four years ago. It is still awaiting parliamentary go-ahead. We, for one, are highly skeptical of the efficacy such populist measures. But the merit of this bill is a different matter. It is an issue that deserves a separate debate.

So simply speaking of passing bills and implementing policies, the government's track record is dismal. Several bills of utmost importance such as the Lokpal Bill or reforms related to land are pending without any deadline.

On the other hand, issues such as FDI in multi-brand retail appear very critical to the government. In fact, the government went so far as to put its survival at stake to ensure the passage of the bill. Why such selective treatment? Is FDI in retail the top agenda for India's future? Is the UPA government really working for the country? Your guess is as good as ours.

Amidst slowdown in global markets, India's exports are in a sort of downtrend. In fact, in FY13, exports fell 4.4% YoY as the demand from overseas markets remained muted. However, it seems that a revival is on the cards this year. The government is confident that exports will increase by 10% YoY this year. However, exporters are confident that the growth figure could be in the region of 20-25% YoY. And there are many reasons for this optimism. The US economy is already showing some signs of revival. It may be noted that US is the largest market for India's clothing exports. Thus, a revival there indirectly helps India's exports. However, European Union is still a cause of concern. Nonetheless, India's dependence on Europe has declined in recent times. Also, increasing exposures to countries like Africa and Latin America that are relatively less impacted by the global slowdown is likely to help boost exports. Overall, it seems that in FY14 export growth is likely to be strong. This should help curb current account deficit provided gold and crude prices do not increase.

After starting the day on a positive yet volatile note, the Indian equity markets rose sharply during the post noon trading session. At the time of writing, the BSE-Sensex was trading higher by about 120 points or 0.6%. Buying activity was witnessed across the board with stocks from the auto, consumer durables and banking sectors leading the gains. As for the BSE-Midcap and BSE-Smallcap indices, the same were up by about 0.3% and 0.5% respectively. Stocks markets in rest of Asia ended the day on a firm note with Japan, Hong Kong and China up by 2.9%, 0.5% and 0.6% respectively.

 Today's investing mantra
"You are neither right nor wrong because people agree with you. You are right because your facts and reasoning are right." - Benjamin Graham

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7 Responses to "Is the Chinese Yuan set to replace the US dollar?"

praadeep wakde

May 14, 2013

I don't think it will happen in near term. As China hold major of it's reserves in Fed's securities (dollar backed). but china will gradually try to counter dollar by giving option to other countries to hold their reserves in Yuan..


joseph oommen

May 10, 2013

All monetary transactions in oil and petroleum are $ denominated. For years now iran and other petroleum exporting countries have been trying to substitute $ for another currency. But it has not happened aand now it is increasingly becoming irrelevant because of the the Shale gas production in US. Soon America is poised to be self suffocient in energy thanks to shale gas and also will will export shale gas. And $ is going to be biggest beneficiary The financial crisis raised the question of $ continuing as reserve currency. but that has recedee and $ willemerge stronger. infact
Britain had this earlier. It was the north sea oil discovery of early 70s that saved the pound and also Britian


Dinyar Eruch Edulji

May 10, 2013

No Yuan cannot replace $ for the simple reason that chinese have invested heavly in US securities and if USD is going to be effected than all the securities held by the Chinese will be dud securities so they will also sink with the $.


Abhay Dixit

May 10, 2013

Zimbabwe and Germany (after first world war?) are two examples of hyperinflation referred to. what was the Debt/GDP ratio when hyperinflation started? What was the quantity of QE (Id one can say that) they had crossed? How does US/Japan compare on these and other parameters with Z and G? when will US and J reach that thresholds?


yatin shah

May 10, 2013

yes yuan set to replace us dollar



May 10, 2013

The mantle of world's reserve currency is created by Faith. Agreed that the reckless printing of dollars has weakened the US dollar. But if one is to ask, who do you trust more, US or China, probably except Pakistan every one will trust US more. It is a more open system than China. You know what is happening there. Do we know what's happening in China? I doubt that unless China turns democratic,open and has a legal system that every one can trust, this will ever happen. and China will not do that in foreseeable future (unless a miracle occurs), Yuan can never be a reserve currency.



May 10, 2013

idea is good but majority of the countries are not going to accept due to rigid political situation and open corrupt practices in China. Basic principle of Communisam is the main factor and China is not acceptable like USA in the world over.

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