2013: The Year of the Renminbi
Multi-national banks keep claiming that 2013 is the year of the renminbi. Skeptics now believe this is far more than a clever marketing scheme.
It hasn't really been a secret that China was working diligently on replacing the U.S. dollar with its own currency.
China's government enabled a conduit for offshore trading of its currency and it's had a few good years so far. Currently, the amount that can be invested by foreign institutions in domestic bonds and equity is limited to 70 billion yuan (roughly $11 billion).
However, the regulator has indicated that another 200 billion yuan will soon be available for investors. Obviously, for every action, there is an equal and opposite reaction. This time, that means the pressure will fall onto the U.S. dollar.
The point being, while an ability issue bonds in, hold and trade the currency offshore is useful, it is the freely tradeable nature of the domestic currency that is the key to a more stable global economy. And while we are not there yet, these latest measures make one think that this will be happening sooner rather than later. The idea that the world will have an alternative to the dollar as a reserve currency in about 20 years' time looks a bit conservative. Perhaps half that number is realistic, which in the scheme of things could be described as being in the "short term".
How will a liquid and tradeable yuan with (more or less) supply-and-demand led floating exchange rate help economic stability? By redressing the balance of the equation "surplus foreign exchange reserves in Asia-Pac and OPEC countries = excess liquidity in Western banks needing a home."
When investors hold on to more yuan, that means they're holding on to less U.S. dollars. This will force our government to “exercise slightly greater fiscal discipline” than they have in the past two decades. Basically, this could be “good thing.”
One year ago today, Jim Rogers predicted the renminbi to double or even triple within the next decade or two. From the sounds of things, his prediction may very well come true in due time.
If we all were able to trade the renminbi internationally one day (China's ultimate goal), it wouldn't be such a bad strategy for investors to stock up on some now.+11
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