Will China’s Yuan Take the Place of the US Dollar as the Primary World Currency?
Analysis and Commentary from Leading China Expert Jim Trippon, editor of the China Stock Digest.
FACT: China has overtaken Japan to become the world’s second biggest stock market by capitalization as investors pile into the fast-growing economy.
FACT: China’s listed companies had a market capitalization of $3,210bn as of July 15 compared with Japan’s $3,200bn, according to recent Bloomberg data. This is the first time China has overtaken Japan since January 2008.
Q: What are the possible reasons for the sudden boost in China's market value past Japan?
A: "Investors are recognizing, both globally and in Japan that China is the first country coming out of global recession. It is not surprising that investors would re-deploy assets to China, which had first half 2009 GDP growth above 7%, while Japan's GDP is running at almost 0 growth, year to date."
Q: Is the run up in China's Shanghai Composite Index, mostly from hot money flowing in from foreign institutions?
A: "Our view is that most of the Shanghai run up is from local individual investors. You have to remember that it is difficult for foreign investors to buy stocks directly in the China domestic stock exchanges, and the limited number of foreign institutions allowed to trade there are not sufficient to account for this recent rally."
Q: "What effect will Beijing's announcement that more IPO's (initial public offerings) will launch have on the market?
A: "At China Stock Digest, we view Beijing's announcement of increased IPOs to be very positive." "This policy should help prevent China’s markets from getting overheated, and it will bring private capital into state owned enterprises to fund their continued business development and expansion."
Q: What is your future perspective? Could China's stock market really surpass the U.S.'s at some point?
A: "Our long term view is not only could China's market surpass the US, but that it will do so; and within the next 20 to 30 years."
"There is old adage, when you’re #2, you try harder. There is no doubt that China’s economic engine is running hard, on all cylinders, unlike the US's economy. The Chinese automakers are not in bankruptcy like ours in the US."
"Also, we have to remember that the US has not always been the world’s largest economy. This position the US holds is really an outgrowth of the WW2 victories over Japan and Nazi Germany."
"The next power rising is clearly China, and what Americans should be doing is learning that this is a positive thing that they can profit from."
Here’s the latest alarmist headline from TIME Magazine: “Replacing the Dollar: China's Big Plans for Its Currency” Should investors pay heed?
A lot of China watchers have been mystified by Beijing’s complaints about the stability of the U.S. dollar. As loud as those complaints may be, they are usually followed by even more Chinese purchasing of the greenback through bonds, T-Bills and other instruments.
China is now the largest holder of U.S. dollar reserves, with its hoard of various dollar-denominated assets believed to be somewhere between $700 million and a trillion dollars. China is followed by Japan with $677 billion in bonds. China’s ongoing buying of U.S. Treasury holdings is good news for the US administration. But why is it still good policy for China?
Analysis and Commentary from Leading China Expert Jim Trippon, editor of the China Stock Digest.
FACT: China has overtaken Japan to become the world’s second biggest stock market by capitalization as investors pile into the fast-growing economy.
FACT: China’s listed companies had a market capitalization of $3,210bn as of July 15 compared with Japan’s $3,200bn, according to recent Bloomberg data. This is the first time China has overtaken Japan since January 2008.
Q: What are the possible reasons for the sudden boost in China's market value past Japan?
A: "Investors are recognizing, both globally and in Japan that China is the first country coming out of global recession. It is not surprising that investors would re-deploy assets to China, which had first half 2009 GDP growth above 7%, while Japan's GDP is running at almost 0 growth, year to date."
Q: Is the run up in China's Shanghai Composite Index, mostly from hot money flowing in from foreign institutions?
A: "Our view is that most of the Shanghai run up is from local individual investors. You have to remember that it is difficult for foreign investors to buy stocks directly in the China domestic stock exchanges, and the limited number of foreign institutions allowed to trade there are not sufficient to account for this recent rally."
Q: "What effect will Beijing's announcement that more IPO's (initial public offerings) will launch have on the market?
A: "At China Stock Digest, we view Beijing's announcement of increased IPOs to be very positive." "This policy should help prevent China’s markets from getting overheated, and it will bring private capital into state owned enterprises to fund their continued business development and expansion."
Q: What is your future perspective? Could China's stock market really surpass the U.S.'s at some point?
A: "Our long term view is not only could China's market surpass the US, but that it will do so; and within the next 20 to 30 years."
"There is old adage, when you’re #2, you try harder. There is no doubt that China’s economic engine is running hard, on all cylinders, unlike the US's economy. The Chinese automakers are not in bankruptcy like ours in the US."
"Also, we have to remember that the US has not always been the world’s largest economy. This position the US holds is really an outgrowth of the WW2 victories over Japan and Nazi Germany."
"The next power rising is clearly China, and what Americans should be doing is learning that this is a positive thing that they can profit from."
Here’s the latest alarmist headline from TIME Magazine: “Replacing the Dollar: China's Big Plans for Its Currency” Should investors pay heed?
A lot of China watchers have been mystified by Beijing’s complaints about the stability of the U.S. dollar. As loud as those complaints may be, they are usually followed by even more Chinese purchasing of the greenback through bonds, T-Bills and other instruments.
China is now the largest holder of U.S. dollar reserves, with its hoard of various dollar-denominated assets believed to be somewhere between $700 million and a trillion dollars. China is followed by Japan with $677 billion in bonds. China’s ongoing buying of U.S. Treasury holdings is good news for the US administration. But why is it still good policy for China?
The usual answer is that China would trigger a collapse of the U.S. dollar by dumping its holdings. Such a move would effectively destroy the debt-ridden economy of China’s best customer, the United States. True enough. But now there’s more at issue for the Chinese and for the U.S.
China is becoming increasingly nervous about the stability of the dollar. Zhou Xiaochuan, governor of the People's Bank of China, warned in March about Beijing's dissatisfaction with the primacy of the US currency, which Zhou says has caused increasingly frequent global financial crises since the collapse in 1971 of the Bretton Woods system of fixed but adjustable exchange rates.
“The price is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies.” Zhou said. In short, Zhou blamed the U.S. for the current global financial crisis.
Since then, Beijing has tinkered with various alternatives to the dollar as a reserve currency. It has called on the IMF to expand the use of so-called Special Drawing Rights (SDRs) as a new international reserve. It has also expanded the convertibility of the yuan for use as a trading currency in limited areas of Asia and greater China.
All of this talk and activity hasn’t changed much of anything. The yuan is still not readily convertible around the world and there is little likelihood that predictions of a new global reserve currency in the shape of China’s yuan will materialize in the foreseeable future as some have predicted. Also, the IMF has responded weakly to the call for wider use of the SDR.
So what’s at the heart of this? China needs one thing above all others. The yuan must be kept relatively cheap in order to make the nation’s exports affordable and attractive. Despite China’s efforts to steer the world away from the dollar as a reserve currency, that hasn’t worked. Beijing even attempted to cut back its dollar purchases for a time with little effect.
Unable to dislodge the dollar as the world standard, China has only one other choice. It must continue to support the value of the dollar in order to keep the yuan relatively cheap.
That’s why China continues to buy more U.S. Treasury notes (albeit short-term as much as possible). In this time of crisis Beijing’s dollar-denominated holdings support the greenback…not to avoid crushing the U.S. economy, but to prevent the value of the dollar from sliding and the yuan from rising.
Because of America’s deep current account deficits, Washington has little choice but to keep selling dollar denominated instruments to willing buyers. Beijing has no choice but to buy dollars with its excess foreign reserve in order to keep economic circumstances stable as long as its economy is export-dependent.
Thanks to China, the dollar remains strong for now. But it may decline as China leads the way to economic recovery.
Investment in Chinese companies may be a viable way to hedge against future moves in the dollar as inflation looms over the U.S. debt-driven economy.
About Jim Trippon:
Jim Trippon is Editor-in-Chief of China Stock Digest, America's #1 pure play China stock newsletter resource for research on the large public company stocks of China. Trippon leads annual investor trade delegations to China and his China Stock Digest has been recognized as the top performing China advisory by the Hulbert Financial Digest, a division of Dow Jones. Hulbert is America's premier independent rating service for investment newsletters.
Trippon's is author of the book Becoming Your Own China Stock Guru: The Ultimate Investor's Guide to Profiting from China's Economic Boom Wiley (April, 2008).
Jim Trippon has been widely featured as an on air contributor to CNN, CNBC, Fox News, Fox Business, and many other national and international media outlets.
For more information please visit www.chinastockdigest.com
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