Yanks Foresee Yuan as World's Top Currency?

There's interesting stuff from Reuters on the contents of the just-released 2011 Annual Report to Congress of the US-China Economic and Security Review Commission. The latter body, as most of you probably know, was created by the US congress in 2000 with some foresight that China was becoming an increasing force in the global political economy that the US had to deal with. Although some members of this commission are definitely scaremongers, their views are for the most part counterbalanced by more nuanced opinions.

I have yet to sift through this mammoth 400-page report which you can avail of by e-mailing a request to USCC.gov. However, the parts concerning the yuan AKA renminbi (RMB or people's money) becoming an international standard currency are quite interesting. Indeed, these folks may be playing up the role of the yuan more than their Chinese counterparts who still follow a strategy of not drawing too much attention to their currency machinations. Rest assured, though, that the Yanks staffing this commission sense the Chinese are up to something:

China's economy is moving up the value chain and its currency could "mount a challenge" to the U.S. dollar in five to 10 years, a congressionally created commission reported Wednesday. "Similarly, it no longer seems inconceivable that the RMB could mount a challenge to the dollar, perhaps within the next five to 10 years," the commissioners said, 10 years after China joined the World Trade Organization...

The Chinese authorities are laying the groundwork for internationalization of the currency via bilateral arrangements with foreign companies and financial centers, particularly Hong Kong, the report said. Goldman Sachs representatives told commissioners that Hong Kong had been tapped to be China's offshore currency platform "because Beijing would be able to fully control the terms of the market," the report said. Hong Kong was returned by Britain to Chinese sovereignty in 1997.

There's also a reference to the imminent PRC leadership succession being an occasion to outline a push to issue more Chinese bank-issued RMB bonds marketed to an international investor crowd:

More mainland-based financial institutions will be able to issue RMB-denominated bonds in Hong Kong under plans outlined by Li Keqiang, China's likely next premier, during an August visit to the financial center, the commission said...

William Reinsch, this year's chairman, said he did not expect the yuan to "supersede" the dollar in coming years unless Beijing floats its currency and removes capital controls. However, "certainly what they're doing in Hong Kong suggests an impending challenge," Reinsch, president of the National Foreign Trade Council, a private U.S. business group, said in a telephone interview with Reuters.

But there is still a long ways to go:

Dollar-denominated financial instruments dwarf their yuan-denominated counterparts in terms of new issuances. But the RMB markets have made remarkable progress in less than a year to achieve 11 percent of the daily trading volume of dollar-denominated markets, the report said.

Still, trade in yuan accounts for a mere 0.3 percent of the $4 trillion changing hands daily in international currency markets, the commission said, with the U.S. dollar making up one side of 85 percent of all trades.

Things can turn quickly, though. Think of the knock-on effects that the US debt debacle will have on dollar confidence in the next few years. It will be interesting to see how the currency game plays out. That is, will China be willing and able to provide public goods in the Asia-Pacific region by making its currency freely traded and (yes) "floating" in a manner it hasn't really up to now? For sure, many financial centres want in on the RMB trading action [1, 2]. Ditto with some of the world's largest multinationals. Then again, teething problems in experimenting with offshore yuan use are evident that need to be ironed out during this, what..."pilot" stage.

With the US down for the count, it's probably wise for the Chinese not to allow themselves to be dragged down along with Washington's gutter politics. Bite the bullet, good burghers of Beijing, and provide the rest of the world with a clear alternative to dollar detritus that has helped roil the world economy to no small extent. Multipolarity is good.