from Blog for Trading Success:
Whenever I have suggested that China may stop supporting the US$, skeptics have effectively said:
“Yeah! And pigs can fly!”
It would be instructive to review their thinking:
- China has reserves of US$2 trillion
- Its reserves are so massive that the only country that can accept buying of that size is the US.
- Thus, China must continue to buy US securities and continue to support the US$ even if it believes the US is embarking upon a path of devaluation through inflation.
The apologists have a point but need to start looking over their shoulders. The Chinese are not one to sit idly by while the US debases its currency.
What can it do?
Reading the news, it’s clear that there is a minor and major strategy at play:
- Minor: diversify into gold and perhaps oil. Chinese gold reserves since 2004 have increased by over 70% at a reported expenditure of over US$30 billion.
- Major: raise the credibility of its own currency. It is doing this in two stages. The first stage is to undermine world confidence in the US$ by proposing an alternative to reserve currency. The second stage would be to substitute the Yuan for the US$.
Substituting the Yuan for the US$ will take time; but the Chinese are nothing if not patient. China has been laying the foundation. Witness:
- Since January 2009, China has signed currency swap agreements worth US$95 million with Argentina, Brazil, South Korea, Indonesia, Malaysia, Belarus and Hong Kong.
- The cross-straits agreement between China and Taiwan
- The yuan carry trade
These are all steps in China’s efforts to dethrone the US$. Sure it won’t happen tomorrow. But if Obama continues on his merry way, expect it to happen.
