Last week, it wasn’t only Jim Rogers who was suggesting that the Chinese yuan (renminbi) will likely become a major reserve currency, if not eventually the world reserve currency.
Later in the week none other than Goldman Sachs projected that the yuan is set to become a major reserve currency.
There are good reasons for this: number one is that the currency pool is just so large. It would be able to keep much of the rest of the world’s assets liquid. Conversely, a small currency pool such as the Canadian dollar cannot – despite the fact that it is one of the soundest currencies in the world. This is a case where size matters.
Next year, China’s economy is already on track to beat out Japan’s as the second largest world economy. It seems to be the right time to start trying to plan your investment strategy accordingly.
Check out the world’s top ten largest sovereign wealth funds
What Benefits From a Yuan Reserve
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I’m not the expert here, but I will offer my best surmises on a few scenarios.
Chinese Stocks As A Whole Rise
With more foreign funds buying into the yuan, it creates more demand on the currency and makes it more valuable. Obviously, I think, before the yuan could become a serious reserve currency candidate, the yuan will have to be significantly, if not fully, unpegged from the USD so as to let it float with the market.
Chinese stocks will go up because they will be the perfect store of value and bets on future growth, denominated in yuan. If you know you’ll have to transact in yuan in the future, you’ll buy Chinese stocks in order to be paid in yuan dividends and make capital gains in yuan, too.
Biggest Foreign Buyers of US Debt
Chinese Yuan Bonds Become Important
Earlier this year it was announced that, of all entities, Walmart was considering issuing yuan bonds. Don’t ask me how Walmart can also get into the yuan bond business, but they may have already done so. If the yuan becomes a regularly-held currency by sovereign wealth funds, expect their bond market to jump in activity, too. We’ll see China Bond ETFs and more.
Since bonds are investments in debt of Chinese corporations and the Chinese government, and they will pay interest in yuan, there will be an expanded market for Chinese fixed income.
What Happens When Other Countries Have the Money?
China’s Import Partners Benefit
If the yuan rises, China’s citizens will have more purchasing power and be more able to spend money on imports. That said, whomever China decides to import from – it will have quite the selection – will benefit enormously from the vast pent-up demand – imagine the force of the total amount of U.S. consumers, multiplied by 10 (it’s like the Baby Boomer generation tripled, or quadrupled – whatever the exact math is.)
Right now, China imports from other emerging markets and resource economies in particular (Canada, Australia, Russia, Brazil). Eventually, China will be able to make a lot of what it imports (like steel). Other resources (like potash) they will continue to need to import from countries like Canada. Already, Australia’s largest trading partner is China, and this has already been a boost to their economy, allowing them to have raised interest rates thrice in the past eight months.
Take a Guess At the World’s Total Networth
For the past year or so all the talk from Washington has been about persuading China to further float the yuan against the greenback. But we may find that soon enough the tide could turn rapidly in the other direction, and that this time the yuan will be pulling more weight than expected. Best to accept the trend and try to prepare your decisions accordingly.
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Good and interesting read ME! I would have to agree with you, might be time to look at ETFs like XCH as part of an indexed portfolio. Hard to ignore an economy fueled by 1 billion people. Walmart, bond market, really?
This is interesting news. If that did happen many would actually benefit from it. Wal Mart is also of major interest as well. Keep up the great work with your blog.
I was surprised at the Wal-mart proposal, too. As for owning Chinese stocks individually (or even in an ETF), I’ve been waiting, because I’m not sure they are all accurately valued yet (in the sense of reacting to potential bubbles in the Chinese economy). I think I want to wait for some bubble in China (eg., coastal real estate) to pop before buying some of these.
Do you really think Yuan is ever going to become the reserve currency? It might, in Asia, but I doubt that European banks and in the foreseeable future going to adapt something that is pegged to a basket of currencies including the Euro. That would be cyclical pegging, which is a weird concept.
And if Yuan loses its peg, it is expected that its value (against dollar, for example) will still rise substantially. I know economic researchers on the whole have not decided whether it is overvalued or not, but still.
I think this is more like a utopia.
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