Chinese Yuan emerges – the new world currency order

May 27, 2011

FOREX, Global Macro

As I noted yesterday all the focus generally seems to be on the USD and the big traded currencies. That makes sense because if you can’t really trade a currency then banks and commentators don’t spend too much time forecasting them. Such is the case with the Chinese Yuan which is on a managed appreciating track against the USD. But China is always front of mind for Australia and about a month ago the IMF published a report which got a few pundits going about the rise of China relative to the USA. Indeed Marketwatch reporter Brett Arends noted that,

The International Monetary Fund has just dropped a bombshell, and nobody noticed.

For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China.

And it’s a lot closer than you may think.

According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.

Since then not too much coverage has been seen as we moved on but I remember when I was wandering the globe doing the currency strategy thing that I seriously thought about buying a unit in Beijing, which I used to frequent a bit to see SAFE, as a currency trade to be held long-term. But the remoteness of my relationship with this investment and the fact that i wouldn’t be visiting it that often gave me pause and it never eventuated.

But to me the re-emergence of China is the story of my lifetime. I have always thought there was a certain inevitability to China taking a place in the world in keeping with its population and now economic size. Watching it transform Australia and the globe and markets more broadly means that eventually its currency will also have to take some form of leadership role.

Here is a link to a piece I posted at lunchtime today over at MacroBusiness about the Rising tide underpinning the Yuan toward becoming a global currency. It is clearly some time away yet but with the chances of China being the world’s biggest economy within the next decade growing then so must the prominence of the Yuan in international trade.

Certainly the Chinese authorities will fight this move and its fair to say they aren’t exactly rushing to let the Yuan internationalise nor are they letting the rate of appreciation accelerate too far or fast. But as they grow more confident that their strength is sustainable and as they become used to their place amongst the leading economies of the world these doors will naturally open.

But just as the Chinese need to become used to their role and place so too may the US need to recalibrate its expectations of its place. Not for a minute am I saying that the US is on the skids because as anyone who has read George Friedman’s book “The next 100 years” will attest America is far from done.

And the next big market hiccup will see the USD rise appreciably I’d posit but structurally and for the long-term a rival is emerging.

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