With the Chinese yuan recently getting on the world stage as part of the IMF’s basket of currencies, there continues to be talk about the yuan one day taking over the U.S. dollar as the world’s reserve currency.
I have been clear in the past that I don’t think this is going to happen. You can never be certain of what might happen 20 years from now, but even then I doubt it.
The dollar will eventually lose its status as the world’s reserve currency, but there isn’t going to be another currency to take its place. The only thing that might work is gold.
Countries are realizing that they no longer have to use the U.S. dollar as a middleman, especially in today’s digital world. They can deal in their own currencies.
There will still be some countries that are completely backwards that will have to use another currency because their home currency is so bad. But even here, they have choices other than the dollar.
The dollar has been strong over the last few years, but that is really the result of the other major currencies just being that bad.
In addition, there is a lot of trouble brewing in Saudi Arabia, which uses the so-called petrodollar. If the House of Saud goes down, then it would not be surprising to see the dollar’s dominance in the oil trade to also go down.
With all of that said, the Chinese yuan is not going to take the dollar’s place on the world stage. It still isn’t a freely floating currency.
The Chinese have enough problems to deal with right now and shouldn’t be worried about getting their currency on center stage. They should be more concerned about feeding 1.3 billion people as its first modern-day recession hits. The biggest bubble in the world is bursting as we speak.
We have also seen the authoritarian nature of the Chinese government with the tanking markets there. China has come a long way over the last 3 decades in liberalizing markets. But the last year has been a good test and we have seen that free markets do not exist there.
I keep seeing stories on the internet about how the Chinese are dumping U.S. Treasuries in preparation of becoming a reserve currency. But if the Chinese are dumping Treasuries, it is probably because they need the money right now.
More important, it seems the claims are simply not true. According to the U.S. government’s numbers, Chinese holdings are holding steady. The latest report shows that China held $1.2645 trillion as of November 2015. This is actually a slight increase from one year ago.
If any country is dumping U.S. Treasuries, it is Japan, which has reduced holdings by nearly $100 billion over the last year. Japan still holds $1.1449 trillion.
The bottom line is that the Chinese officials are a bunch of mercantilists. They believe in keeping the yuan weak in order to boost exports. Meanwhile, the Chinese people are stuck paying higher prices.
In conclusion, the Chinese yuan will not be the next reserve currency of the world. China will be lucky to have any economic growth at all over the next few years. Things are going to get worse there before they get better.