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Thoughts from the Frontline

The Renminbi: Soon to Be a Reserve Currency?

September 28, 2013

I get the question all the time: when will the Chinese renminbi (RMB) replace the US dollar as the major world reserve currency? The assumption behind such questions is almost always that the coming crisis in US entitlement programs will force the Fed to monetize even more debt, thereby killing the dollar. Or some derivative line of that thought. Contrary to the thinking of fretful dollar skeptics, my firm belief is that the US dollar is going to become even stronger and will at some point actually deserve to be the reserve currency of choice rather than merely the prettiest girl in the ugly contest – the last currency standing, so to speak.

But whether the Chinese RMB will become a reserve currency is an entirely different question. Of course it will, over time, but the question has always been when. There are some preconditions required for reserve currency status. Quietly, apart from anything that might happen to the US dollar, China is working to meet those conditions. Rather than wallowing in concerns about China's actions, we might opt for a more thoughtful and constructive response: to…

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Ronald Nimmo

Oct. 3, 2013, 9:29 p.m.

Alex Parkhurst: The $80B John cited did not just refer to raw natural gas but to products derived from oil and natural gas, the more profitable value-added products.

Ronald Nimmo

Oct. 2, 2013, 6:33 p.m.

I am puzzled over this excerpt from your commentary:

“The US trade deficit (a key component of the current account deficit – see chart on next page) fell to an unprecedented percentage of GDP during the last decade, a development that normally heralds a significant drop in a currency.”

I thought that an improvement in the current account balance created a rising currency value, not a declining one. If the US trade deficit fell as a percentage of GDP, that means it is improving, not getting worse. Therefore the dollar should grow stronger, not weaker. I think John must have been half-asleep when he wrote this.
  I also know that the early 2000’s could not have been an “unprecedented” low for the US trade deficit in economic history, because there have been long periods when the US ran a trade surplus, although in the late 19th Century, when we often ran a trade surplus, we were also importing capital, which is a negative entry in the current account balance. By the 20th Century we started becoming a big exporter of both capital and products.

Robert Visconti

Sep. 29, 2013, 4:02 p.m.

John - I’m at sea about $ global strength.
If current account drops and shrinks supply of $$$ outside U. S., how will we be able to sell sufficient Treasury securities to finance our $17 trillion, $18 trillion, etc. etc. national debt?
Are there not implications for the Reserve Currency power of the $ if we are unable to get our country’s fiscal house in order?
What is the interplay between continuing out of control Federal spending and shrunken current account deficits, when considering the future health of our currency??

Henry Mortimer

Sep. 29, 2013, 11:42 a.m.

I think that your explanation of the “money flows” does not reflect the reality of what actually happens in an international transaction. If we buy, say a barrel of oil from a foreigner, what happens is that the seller is credited with the purchase price which gives him a deposit in a US bank. At this point, the seller has three choices: he can leave the money in his deposit account at a US bank, he can sell his dollar deposit to someone else in exchange for another currency or he can ask that his dollar deposit be moved to a bank outside of the US (where it will become a Eurodollar). What actually happens in this latter case is important: the dollars never leaves the US; instead the US bank issues a “due to” to the foreign bank in the amount of the deposit and the foreign bank will record this asset as a “due from” the US bank. On its books, the US bank will replace the seller’s deposit with the “due to” the foreign bank. As you will realize, no flows of money are involved, just changes in the ownership of US deposits.  Obviously, this is true in reverse, but with the exception of a few currencies the deposit is invariable sold for another currency. I would note, however, that the dollar benefits from more confidence than most currencies and this is why the majority of trade is transacted in dollars and why foreign central banks who clear these transactions are willing to hold dollar deposits in US banks on their balance sheets in the form of reserves.

Giles Conway-Gordon

Sep. 29, 2013, 8:07 a.m.

There is one factor which should not be overlooked in any analysis of the ascent of the CNY to reserve currency status. This is that, unlike all other reserve currencies, China is not a stable democracy. (Indeed there is also some question whether it is even a stable economy; as we saw with the USSR, authoritarian regimes as deep-died as China’s is produce the statistics they desire, regardless of the facts.)
As several China commentators have noted, it is very difficult to see China making the necessary and now unavoidable shift from an artificial government-subsidized, investment-led economy to a more normal and sustainable economic structure driven by consumer demand without a major, probably destabilizing, political transformation.
Giles Conway-Gordon

Sep. 28, 2013, 11:07 p.m.

Before I read your piece, I jotted down a few thoughts on the title. Viz:
1.The Chinese are just beginning to understand free markets
2.They have had oinx (Mandarin: means “many”) years of communism (1949) and before that even oinxer years of Confucionism.
3.They think to embrace “Capitalism” (with a socialist face ?) - but their only visible exemplar is “Crony Capitalism”; they understand that.
4.Many (most) (ALL ?) of the party top is invincibly ignorant of FREE markets - ‘cos all politicians are Statists.

Then I read your piece. Ooops!  “..sufficient supply of dollars..”  !?
The quantity of money is irrelevant to the economy: except that increasing it is inflationary. And hyper inflating the money supply is destructive (mega).

AND (less U$)  “..akin to losing a chair in a game of musical chairs ..”
NOT. Fewer U$ dollars means having to economise (from “economy” - “to live within one’s means” - archaic, no longer p.c.)  As in the case of the man who uses his house as a source of cash from the bank, because house prices only go up, until they stop, and then the bank stops, and there are fewer U$ dollars, and your man has to economise - spend less, cut back, go without, cut currants in half, recycle, go hungry, stop splurging. Phenomenon not unknown in the USA. Europe. & etc.

This is not “removing a chair”  One man’s economy reduces the consumer section of the economy from 70% to 69.99999999999999999999…....% Before, when he splurged, he increased the economy to 70.0000….....%
Trivial. To make any effect on the national GDP (or GDC) the man has to be joined by more people, doing the same thing. Are there many such? Say 50 million? Or 100 million ? Then you are talking big potatoes, but this means you are playing the macro game, aggregating many millions over many years, and assuming “things” will stay the same. Unlikely. I recall projections that “if things go on like this for another ten (twenty?) years, Japan’s economy will be larger than that of the USA. Never happened.

You seem to be suffering from the (v understandable) American spin, or groupthink, or doublethink, or downright fraudulent pretence that America’s “supply” of U$ dollars to the world somehow meets some “need” for international “liquidity”, which the Fed can meet(by counterfeiting.)
Under normal civil law, this would be seen as fraud, or theft, or as a gigantic conspiracy. But do not take this too hard. The rest of us just have to live with it. “It’s our currency, but your problem.”

Have a nice day.

Anthony Stanford

Sep. 28, 2013, 2:14 p.m.

Quick note: the “yuan” is not another name for “renminbi”. Renminbi is the name of the currency, which is denominated in yuan. Think of it as an undifferentiated noun, like “water”. “Renminbi” is what it is (“water”), “yuan” is how much (“gallons”, “liters”, “cups”, etc.). If there’s a number involved, you want to use “yuan”. If there isn’t, you probably want to use “renminbi”.

You can ask for “three waters and a coke” from a waitress (analogous to “5 renminbi”), but it really ought to be be “three glasses of water and one of coke”. On the flip side, you can ask for “five yuan” (analogous to “three glasses”) without specifying the currency, because it’s implicit in the measure, “yuan”. If more than one currency was denominated in yuan (I don’t think that’s the case), you could specify “five yuan of renminbi.”

Sep. 28, 2013, 11:06 a.m.

I would recommend the following book for all who believe that the US has entered into a long term energy boom based on short term results from unconventional shale gas/oil projects.  “Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth” by Bill Powers.