US debt crisis turns focus on yuan as reserve currency

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US debt crisis turns focus on yuan as reserve currency


Washington may have averted a debt default by compromising on how to cut the US budget deficit, but underlying problems remain and those economic woes are driving a global search for an alternative reserve currency.

Officials, from the head of the International Monetary Fund (IMF) to the Philippines finance minister, have warned that the US dollar may lose its reserve status.

For China, the largest lender to the US and the world's second biggest economy, the answer is close to home.

"I think the US debt crisis adds new urgency to the Chinese government's efforts to promote the yuan as an international currency," Zhang Ming, a Beijing-based scholar at the Chinese Academy of Social Science (Cass), tells BBC News.

"Promoting the international use of the yuan will become a way to reduce the country's reliance on the value of US Treasuries."

China holds more than $3.2trillion (20.6tn yuan; £2tn) in foreign exchange reserves, of which 70% is estimated to be in US dollars.

As the dollar falls in value against the Chinese yuan and other currencies around the world, because of the US's financial problems, Beijing faces losses on its holdings.

And that threat may worsen if any of the world's three main credit rating agencies decide to downgrade their triple-A rating for US sovereign debt.

Greenback or redback?

Mr Zhang, who is deputy director of the Research Center for International Finance at Cass, says the global financial crisis of 2008 was the main external reason behind Beijing's efforts to promote the yuan beyond its borders.
 
"Before the outbreak of the sub-prime crisis, the US dollar was considered a stable international reserve currency," he says.

In July 2009, less than a year after the collapse of investment bank Lehman Brothers, Beijing announced a pilot programme allowing some companies to settle imports and exports with yuan.

That programme was expanded a year later, and continues to grow rapidly, though it is still only a tiny portion of China's overall trade.

According to UBS Securities, trade settlement in the Chinese currency rose from just 18.4bn yuan ($2.86bn; £1.95bn) in the first three months of 2010 to 360bn yuan in the first three months of 2011.

China has signed so-called currency swap deals with Singapore, South Korea, Malaysia, Indonesia and Argentina, among others.

That means companies outside the mainland can borrow large amounts of yuan for doing business.

In August 2010, McDonald's became the first foreign company outside the banking sector to issue yuan-denominated bonds, popularly known as dim sum bonds, in Hong Kong.

A massive, actively-traded debt market is a pre-requisite for any currency to become a reserve currency.

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William Nobrega

    If the US suddenly developed the courage to have a massive reduction in our debt... we would remain the world's pre-eminent reserve currency. But, that's probably not going to happen"”

William Nobrega Conrad Group

[ivanm]

It appears that our debt situation has spun out of control to the point that the best we  can hope for is a balanced budget, which would eliminate new debt, and paying the annual interest due from tax receipts. 

I think a real sleeper, politically speaking, is the mounting debt owed to the so called trust funds.  Interest on this monstrous debt is not paid in cash each year, but is simply paid by issuing more Treasury debt.  Frankly I see no intent of the pols to ever address this issue and I see no chance to ever recover the loss of some 3 trillion plus that is due the trust funds.  The intergovernmental debt, as it is called, is rivaling the debt held by the public.

If this isn't hiway robbery I will kiss Pelosi's fat ass.     Yuck, maybe the other ass, the one under the wig.  At one time that old babe turned me on 'cause I like aged meat and big knockers, but I am getting choosy in my old age. Heck, if I can't have them all then why  not hold out for the best?