Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Bank of China Seeks to Create Global Currency

Currencies / China Currency Yuan Jan 13, 2011 - 05:58 AM GMT

By: Money_Morning

Currencies

Best Financial Markets Analysis ArticleKerri Shannon writes: State-owned Bank of China Ltd. has announced that it will allow U.S. customers to open yuan accounts to buy and sell China's currency.

According Money Morning Chief Investment Strategist Keith Fitz-Gerald this is yet another deliberate move by China, which is attempting to promote the role of its currency in global trade.


"Prior to July 2010 such trading had been confined within China," says Fitz-Gerald. "Then, the government allowed limited yuan trading in Hong Kong, which has surpassed all expectations by blossoming literally from zero to more than $400 million a day. Against that baseline, here they come and here the Yuan comes."

While U.S. customers can already trade yuan through some Western banks, this move signifies the progression of China's goal to internationalize yuan trading.

BOC will limit individuals to $4,000 in trades per day and $20,000 per year, to prevent speculation in the currency. But there is currently no limit on firms and businesses, as long as they are involved in international trading.

"We're preparing for the day when renminbi becomes fully convertible," Li Xiaojing, general manager of BOC's New York branch, told The Wall Street Journal. The bank wants to be "the renminbi clearing center in America."

The move is also geared to reduce reliance on the U.S. dollar and push the yuan into a greater role as a global currency. Many are concerned that the U.S. dollar's value will decline as the U.S. Federal Reserve maintains its loose monetary policy. China, which holds nearly $3 trillion in foreign exchange reserves largely in dollar-denominated assets, is particularly concerned.

"China sees the global financial system as too U.S.-centric and dollar dependent," Robert Minikin, senior currency strategist at Standard Chartered Bank in Hong Kong, told The New York Times. "That created issues during the financial crisis."

Zhou Xiaochuan, Governor of the People's Bank of China (PBOC), in 2009 released an essay entitled "Reform of the International Monetary System" on the central bank's Web site calling for the dollar to be dismissed as the world's main currency reserve.
China also has signed billions of dollars in currency swap agreements to promote the yuan's use in international trade. And most recently, Chinese regulators last month increased by 7,000 the number of exporters that are allowed to use the yuan to settle global trade transactions.

Analysts predict that within a few years about 20% to 30% of China's $2.3 trillion of imports could be settled in yuan instead of U.S. dollars, up from the less than 1% today.

Money Morning's Keith Fitz-Gerald says this shift to the yuan is something for which the United States is not prepared.

"Arrogant U.S. officials will be stunned in a few months by the giant sucking sound this is going to create in the dollar," said Fitz-Gerald.

Fitz-Gerald calls China's recent move a "monster game changer," and said the yuan is on its way to meeting its global currency goal.

"Watch the yuan become a store of value on par with the U.S. dollar, the Japanese yen and the euro within five years, and still remain nearly completely outside the traditional western currency trading pairs and the sovereign debt risk that makes them all but worthless - quite literally and figuratively." said Fitz-Gerald.

Fitz-Gerald said China's other three big China state-owned banks - China Construction Bank Corp., Agricultural Bank of China Ltd. and Industrial and Commercial Bank of China - will shortly follow BOC's new policy, further broadening the yuan's liquidity. They will compete with each other for yuan clearing services, shutting out unprepared U.S. financial institutions.

Yuan trading by offshore entities will skyrocket as institutions jump on the trade. While most U.S. corporations settle in U.S. dollars, the yuan's appeal is growing. McDonald's Corp. (NYSE: MCD) and Caterpillar Inc. (NYSE: CAT) recently became the first U.S. non-financial companies to sell yuan-based bonds in Hong Kong.

Fitz-Gerald also said U.S. consumers should brace for higher inflation as the yuan strengthens and raises the price of Chinese goods.

"The loudmouths in Washington who believe that China's yuan is undervalued are now going to get a terribly painful lesson in how the real world works when a country with $2.8 trillion in reserves starts calling its own shots," said Fitz-Gerald.

U.S. Treasury Secretary Timothy F. Geithner has repeatedly asked China to revalue its currency, claiming it is too cheap against the U.S. dollar and gives Chinese exporters an unfair advantage. China's trade surplus with the United States increased by 26% in 2010 to $181 billion.

Geithner said in a speech yesterday that while China's tight exchange rate control has kept the currency "substantially undervalued," both countries were starting to see benefits of the yuan's recent appreciation.

"We're probably….at the end of the second inning…but it is changing and it has to happen," Geithner said.

The dollar has dropped to 6.6 yuan from 6.83 at the start of the year. The yuan currency is strengthening at a 10% rate when accounting for Chinese inflation.

"So if that appreciation was sustained over time, it would make a very substantial difference in correcting what is a major distortion for the Chinese economy and the global economy," Geithner said.

China in June by agreed to increase yuan flexibility by allowing the currency to move up to 0.5% each day.

"Conditions are in place for sustained yuan appreciation against the dollar," said Standard Chartered's Minikin, who predicts the yuan will move 6% this year to 6.20 per dollar.

Fitz-Gerald said this development solidifies for investors why China is such an important part of the New Year.

"If you haven't already bought yuan as part of your Chinese investing program, now's the time to do so," said Fitz-Gerald. "Having the yuan on the world's stage will unleash a wave of purchasing power the likes of which the world has never seen and it is a game changer in the truest sense of the world."

[Editor's Note: China's campaign to transform the yuan into the world's new reserve currency is so crucial a development for investors that Money Morning will be following the story with a four-part series beginning next Tuesday. Be sure to check in for more insight from Money Morning Chief Investment Strategist Keith Fitz-Gerald.]

Source : http://moneymorning.com/2011/01/13/...

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in