How China is Moving to Make Yuan The Reserve Currency

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HBO’s TV Series The Game of Thrones is great fiction that is written by amazing writers, but realty is becoming more interesting than the actual TV program. For those of you who are unfamiliar with that TV program it is about different sovereign powers vying to rule over 7 Kingdoms, which includes conquering mortal enemies and forming alliances with other foes making for strange bedfellows.

In reality, instead of sovereign powers fighting to gain control over 7 fictitious Kingdoms we have sovereign powers vying to be the largest economy of all the 7 Continents. Of course, such power does come with great responsibility but it also comes with global economic dominance. One way that a State becomes and is recognized as a global economic power is when its currency is used as the primary financial instrument of international trade.

The United States is the largest economy in North America and is the largest economy in the world with China running a close second. China is the largest economy on the continent of Asia and is followed by Japan. Regarding the continent of Europe, Germany is the largest economy on that continent and is followed immediately by the United Kingdom. South America’s largest economy is Brazil and Africa’s largest Economy is Nigeria. http://money.cnn.com/news/economy/world_economies_gdp/.

The other continents are important and relevant, but not in the context of this Post. Most if not all of the States highlighted have gained its top positions as a result of international trade. Specifically, China is one of the world’s top exporters of manufactured goods and is benefiting from a record amount of foreign investment, which it is using to invest abroad, http://www.bbc.com/news/world-asia-pacific-13017877, whereas Germany’s economic standing is attributable to its standing as a leading manufacturer and exporter of vehicles, machines and chemicals. http://www.bbc.com/news/world-europe-17299607.

Brazil gained its economic status through steady growth and poverty reduction, coupled with its increased manufacturing sectors,http://www.nytimes.com/2014/12/30/world/americas/an-economic-boom-recedes-but-south-america-might-avert-the-bust.html?_r=0, while Nigeria’s decision to rebase its gross domestic product (GDP) data attributed to it surpassing South Africa as its continent’s largest economy. Nigerian GDP now includes previously uncounted industries like telecoms, information technology, music, online sales, airlines, and film production. http://www.bbc.com/news/business-26913497. Nigeria is also the number one exporter of oil and has the second largest oil reserves on its continent.

If you paid attention in history class or if you were fortunate enough to attend school during a time when local school boards did not mandate that children be taught standardize tests you might recall learning about the American and French Revolutionary Wars, and about Genghis Khan. Notwithstanding the Revolutionary Wars, you might recall being taught that Khan united most of the Tribes in Northeast Asia to create the Mongol Empire. Although no one is celebrating the method Khan used to accomplish this feat, one must take note of the strategy he used to gain the loyalty of those he conquered.

As with any war, the victor usually take the spoils from that battle which typically includes land, natural resources or public and private treasures. The victor also disbands the loosing army to ensure that it will not rise up against it later. What Khan did was something extraordinary for that time period, he made it a point to incorporate the loosing army into his own army, he offered protection to its citizenry and he proclaimed that both solider and civilian share in the spoils of future victories. http://en.wikipedia.org/wiki/Genghis_Khan. Who would pass up such a deal considering the alternative?

The French Revolutionary War stemmed from France’s efforts to restore its financial prowess in the world after having its national treasury drained as a result of two military campaigns, the Seven Years’ War (Referred to as the French & Indian War in the U.S.) & the American Revolutionary War. France attempted that task by raising taxes on an already war torn and weary public, which resulted in the French Revolution. The British devised the same monetary Policy as a means to raise money, which resulted in the American Revolutionary War. Money has been the impetus of wars since the beginning of time and has led to the birth of a nation such as the United States.

The United States prevailed during the American Revolutionary war because of the financial and material support it received from France, Spain and the Netherlands, http://en.wikipedia.org/wiki/American_Revolutionary_War, which evidence my contention regarding the importance financial superiority. Without France’s vast national treasury at that time Americans today would be speaking with a British accent, getting 28 days of paid vacation days off each year, http://www.nidirect.gov.uk/index/information-and-services/employment/employment-terms-and-conditions/time-off-and-holidays/holiday-entitlements.htm, and be entitled to free health care. Those Damn French people have done it to Americans once again!

The Real Game of Thrones began in earnest In 1958 when Belgium, Germany, France, Italy, Luxembourg and the Netherlands formed an alliance called the European Economic Community (EEC) based on the premises’ that countries that trade with one another will become economically interdependent on each other and will more likely avoid conflict with one another, which may affect the economic stability of each member State. http://europa.eu/about-eu/index_en.htm.

In 1993, in an effort to gain economic dominance in the world 12 member States on the continent of Europe formed an alliance called the European Union (EU), which stemmed from the EEC. http://en.m.wikipedia.org/wiki/Maastricht_Treaty. Currently, the EU has 28 member States, but the organization may face financial calamity if Greece decides to leave the EU or if it defaults on its loan obligations that are backed by EU member States via the European Central Bank. http://www.economist.com/blogs/buttonwood/2015/01/greece-and-euro.

Next to form an economic alliance were Africa States. In 1999, the Heads of State and Government of the Organization of African Unity issued a Declaration (the Sirte Declaration) calling for the establishment of an African Union (AU) to accelerate the process of integrating the continent in an effort to enable it to play a role in the global economy. http://www.au.int/en/about/nutshell. Speaking of powerful kingdoms, most of the great Monarchies rose from that continent with the likes of Egyptian King Narmer who unified Egypt and King Tenkamenin of Ghana who facilitated the Sahara Gold Trade. http://answersafrica.com/african-kings.html. Currently, the AU is comprised of 54 African member States.

Not to be left out, in 2011 Brazil, Russia, India, China and South Africa organized the BRICS Forum. It is an independent international organization that encourages commercial, political and cultural cooperation between its member States. http://en.m.wikipedia.org/wiki/BRICS.

Although China is located on the continent of Asia, as a founding member of the BRICS Forum one can presuppose that China was instrumental in creating the alliance between those States. One can also presume that China was instrumental in the BRICS creating economic development mechanisms for the benefit of itself and member States of the Forum. One of those financial tools is called the New Development Bank (NDB), which is headquartered in Shanghai, China. It was established to finance infrastructure and sustainable development projects for member States and the other financial tool that was created is referred to as the Contingent Reserve Arrangement (CRA). It was created to assist member States going through financially difficult times by providing additional liquidity protection during balance of payments problems. http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/07/17/what-the-new-bank-of-brics-is-all-about/.

Encouraging the Creation of those financial tools bold well for China because it fosters loyalty from other BRICS members and gives China and other member States the opportunity to prescribe the conditions and parameters for approving such financial assistance, much liked the World Bank and the International Monetary Fund (IMF) do today.

China is also working to make the Yuan the international currency of trade, https://justdmarkets.com/is-yuan-the-new-dollar/, by approving international hubs where its currency can be exchanged/converted into the Yuan as opposed to first converting a currency into the U.S. Dollar. Such hubs are now located in Australia, Hong Kong, Taipei, Singapore, Paris, Seoul, London and Frankfurt.

It appears that China is strategically approving clearing houses for its currency in States where international trade is being facilitated on a global scale. Such action evidence that the Yuan is being given serious consideration internationally and signals that it may be in a position to challenge the U.S. Dollar as the world’s reserve currency in the near future.

Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington, recently commented that China is no longer intervening in the foreign exchange market on a large scale, http://www.forbes.com/sites/kenrapoza/2014/08/18/china-cuts-u-s-debt-holdings-again/, and I believe that it is due to China’s effort to support its own development bank. Since June 2014, China has begun to lower its U.S. debt holdings for the fourth time, dropping from $1.317 trillion last November to $1.28 trillion.  When economies such as China get into a bind financially, its options are the World Bank or the IMF which comes with a whole host of conditions and stringent fiscal policy requirements.

If what the economist are saying about China’s housing bubble is true then China needs to strengthen its financial house before that bubble burst by formulating new fiscal monetary policies, which it is currently doing. http://www.cnbc.com/id/102453731. Another way that China can ensure that its economy will remain stable during a “balance of payment problem” like the bursting of its housing bubble is to create a financial institution such as an economic development bank with its trading partners. Well check that option as complete!

Each of the States named in this Post have signed trade Pacts with various States on different continents to bolster its economic prowess, http://en.m.wikipedia.org/wiki/List_of_multilateral_free_trade_agreements, but it appears from China’s actions that it is vying to challenge the United States’ Dollar as the dominate international currency of trade and the U.S’s standing as the world largest economy.

You may ask what is the benefit of being the largest economy of all the 7 continents, well just ask the Roman leaders during the time of Julius Cesar or the tribal leaders of Northeast Asia during the rule of Genghis Khan. They and history will tell you that States’ economy grow and thrive by having its currency be the main currency of trade, which in present day also means dictating the perimeters on which that States’ currency is used for trade. For example, by agreement oil is currently being sold by oil producing sovereigns and accepting the U.S. dollar (petrodollar) as the only form of payment, http://www.huffingtonpost.com/alastair-crooke/petrodollar-us-saudi-policy_b_6245914.html, which makes the United States a major player in the global oil market. If a State’s only means to purchase oil is via the U.S. dollar, then that means that other States must maintain a huge supply of the U.S. dollar as a reserve currency, thus the impetus of the U.S. dollar becoming the World’s reserve currency.

The petrodollar has been the dominate currency for trading oil all over the world for the past 41 years, which has been the driving force behind the U.S’ economic, political and military power. But like the current story line in HBO’s TV show, The Game of Thrones, winter is coming and it’s disguised in Gold. There is an old adage which prescribes that He Who Has the Gold Makes the Rules and history has shown that to be evident regarding global geopolitics.

To highlight my opinion regarding China’s strategic economic moves to become the world’s largest economy I present what some market participants believe to be proof positive. They believe that China is building up its gold reserves to challenge the U.S. dollar and China’s official news agency, Xinhua, said “International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.” http://www.usatoday.com/story/money/markets/2014/11/09/cheat-sheet-china-gold/18644197/.

I’m sure that China is not advocating that the Euro be the global reserve currency, but its latest efforts to make the Yuan the international currency of trade has to raise some eyebrows in the U.S. Which of the States’ economy mentioned in this Post will be the largest to rule over the 7 continents economically is anyone’s guess, but If China’s efforts to build strategic alliances and draft economic contingency plans comes to fruition then it stands to reason that it will win The Game of Thrones.

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Allen Thomas