Friday, May 15, 2009

Internationalization of the Yuan

Today, the Bank of China Chairman Xiao Gang announced the beginning of a scheme to internationalize the Chinese Yuan. The immediate real effect of this declaration will be relatively mild, this internationalization will only concern trading relationships with south-east asian countries, but we can expect a psychological effect on the exchange rate of the Yuan, and therefore a trade shorting USD against the CNY seems possible.

On a more fundamental point of view, the Yuan is still very far from being a reserve currency, but given the geopolitical situation, and the weakening of US economy, the environment is certainly propitious for China to undertake such measures in the direction of a strengthening of the Yuan and basically an affirmation of its real weight in the world economy. Clearly, until now, China has been relying on US consumption to boost its economy, with this consumption currently falling (and still far from bottoming), China would be well-inspired to develop its domestic consumption and that supposes a strengthening of the Yuan.

For more details, see Reuters, insiderNews,...etc.

7 comments:

Eyal said...

What makes you think consumption is far from bottoming?

Jean-Philippe said...

Hi Eyal,

Well, unemployment is still rising, albeit more slowly (though if you consider that this slow down is due to 66000 new government positions, it may not be that significant), and at some point of time, taxes will have to go up, both locally (most states are almost bankrupt) and federally.
Besides, american people seem to have realised that spending all your money (and actually more than you have) is not such a great idea, so private savings are on the rise (see http://www.calculatedriskblog.com/2009/05/mew-consumption-and-personal-saving.html), but it's still only at 4.2% is 2009 Q1, I would expect to go up to about 10% given the psychological environment, and maybe higher.

Cheers

JP

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