YUAN A DE FACTO RESERVE CURRENCY BEFORE IT IS FULLY CONVERTIBLE

YUAN A DE FACTO RESERVE CURRENCY BEFORE IT IS FULLY CONVERTIBLE

Making sense of currency war:

nothing lasts forever - especially reserve currencies

especially in light of China's recent comments

"the dominance of the greenback is the root cause of global financial and economic crises,"

See NOTES at the end of this article

40 CENTRAL BANKS ARE BETTING THIS WILL BE THE NEXT RESERVE CURRENCY

Submitted by Tyler Durden on 04/08/2014

http://www.zerohedge.com/news/2014-04-08/40-central-banks-are-betting-will-be-next-reserve-currency

As we have discussed numerous times, nothing lasts forever - especially reserve currencies - no matter how much one hopes that the status-quo remains so, in the end the exuberant previlege is extorted just one too many times. Headline after headlines shows nations declaring 'interest' or direct discussions in diversifying away from the US dollar... and as SCMP reports, Standard Chartered notes that at least 40 central banks have invested in the Yuan and several more are preparing to do so. The trend is occurring across both emerging markets and developed nation central banks diversifiying into 'other currencies' and "a great number of central banks are in the process of adding yuan to their portfolios." Perhaps most ominously, for king dollar, is the former-IMF manager's warning that "The Yuan may become a de facto reserve currency before it is fully convertible."

The infamous chart that shows nothing lasts forever...  [open this website to see the chart]
Nothing lasts forever... (especially in light of China's recent comments)

As The South China Morning Post reports, Jukka Pihlman, Standard Chartered's Singapore-based global head of central banks and sovereign wealth funds (who formerly worked at the International Monetary Fund advising central banks on asset-management issues), notes that:

At least 40 central banks have invested in the yuan and several others are preparing to do so, putting the mainland currency on the path to reserve status even before full convertibility

The US dollar remains in charge (for now)...but

The US dollar is still the world's most widely held reserve currency, accounting for nearly 33 per cent of global foreign exchange holdings at the end of last year, according to IMF data. That ratio has been declining since 2000, when 55 per cent of the world's reserves were denominated in US dollars.

The IMF does not disclose the percentage of reserves held in yuan, but the emerging market countries' share of reserves in "other currencies" has increased by almost 400 per cent since 2003, while that of developed nations grew 200 per cent, according to IMF data.

As SCMP goes on to note, the rising popularity of the yuan among central bankers is probably mainly due to Beijing's extremely favourable treatment of them as it has sought to encourage investment in the yuan.

For example, central banks enjoy preferential treatment in the qualified foreign institutional investor category, both on the size of the quota and the length of the lock-up period. The QFII quotas given to central banks are not publicly known, but some of those announced by investing central banks are up to 10 times larger than others in the programme and, most importantly, free of any capital controls.

"Central banks and sovereign funds have special treatment," Pihlman said. "They have the ability to invest in a way that any other investor does not have. When it comes to convertibility, there is nothing formally out there, but it is fully convertible."

As Pihlman explains, things are accelerating...

Pihlman said "a great number of central banks are in the process of adding [yuan] to their portfolios".

"The [yuan] has effectively already become a de facto reserve currency because so many central banks have already invested in it," he said. "The [yuan] may become a de facto reserve currency before it is fully convertible."

The central banks more likely to add yuan holdings in the future were the ones with "strong trade linkages to China" and those which had relatively large levels of reserves which could consider diversifying more for return-related reasons, he said.

"The [yuan's] convertibility may be already there for central banks in a way that has got them comfortable to start investing in the currency," Pihlman said.

We leave it to a former World Bank chief economist, Justin Yifu Lin, to sum it all up...

"the dominance of the greenback is the root cause of global financial and economic crises,"

It appears the world is beginning to listen

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NOTES:

1- nothing lasts forever - especially reserve currencies

Nothing Lasts Forever; World Bank Ex-Chief Economist Calls For End To Dollar As Reserve Currency. Submitted by Tyler Durden on 01/29/2014.  http://www.zerohedge.com/news/2014-01-29/nothing-lasts-forever-world-bank-chief-economist-calls-end-dollar-reserve-currency

2- especially in light of China's recent comments  

China's Official Press Agency Calls For New Reserve Currency, And New World Order. Submitted by Tyler Durden on 10/13/2013. http://www.zerohedge.com/news/2013-10-13/chinas-official-press-agency-calls-new-reserve-currency   Brief summary:

China's (which as a reminder is the single largest offshore holder of US Treasury paper, and the second largest of all only second naturally to the Federal Reserve whose $85 billion in monthly monetizing "flow" is what is keeping rates from exploding higher) thoughts as captured in the Xinhua Op-ed:

• Reform of the world’s financial system should include the introduction of a new internatonal reserve currency to replace the U.S. dollar
• The international community could thus permanently stay away from the spillover of intensifying domestic political turmoil in the U.S.
• Fiscal impasse in the U.S. is a good time for “befuddled world” to start considering building a “de-Americanized world”
• Impasse has left many nations’ dollar assets in jeopardy and the international community agonized
• Other cornerstones should be laid to underpin a de-Americanized world, including respect for sovereignty, recognizing authority of UN in handling global hotspot issues and giving developing and emerging market economies more say in major international financial institutions
• Purpose of such changes is not to “completely toss the United States aside,” rather to encourage Washington to play a much more constructive role in addressing global affairs

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3- "the dominance of the greenback is the root cause of global financial and economic crises"  

It was said so by Justin Yifu Lin, a former World Bank chief economist

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