Investing in the Chinese Yuan: World's Reserve Currency by 2030?

AHEAD of a looming Sino-American summit, it's once again time for newspapers to allocate ink to coverage of the spat over the value of China's currency. Happily, we seem to be seeing an improved understanding that movement in the nominal dollar-yuan exchange rate is not the most important factor shaping imbalances. Tim Geithner (who, bless him, once got in trouble for saying that the dollar needed to decline) declared today that the yuan is "substantially undervalued" and needs to strengthen.

…at least not according to the US Treasury (see the Treasury’s Interim Report on Exchange Rate Policy). According to the Treasury’s report:

A month ago we pointed out that as a result of Australia's unprecedented reliance on China as a target export market, accounting for nearly 30% of all Australian exports (with the flipside being just as true, as Australia now is the fifth-biggest source of Chinese imports), the two countries may as well be joined at the hip.

Once again we are seeing articles and research papers stating the Chinese renminbi (yuan) is about to replace the dollar as the global reserve currency.Here is a working paper by Arvind Subramanian and Martin Kessler at the Peterson Institute of International Economics stating The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?.A country’s rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or explicitly.

One more domino in the dollar reserve supremacy regime falls.

The Ponzi schemes and off-balance sheet loans in China's banking system are in the forefront of today's news. Reuters reports Bank of China executive warns of shadow banking risks A senior Chinese banking executive has warned against the proliferation of off-book wealth management products, comparing some to a Ponzi scheme in a rare official acknowledgement of the risks they pose to the Chinese banking system.

BACK in July, a souped-up version of The Economist's Big Mac index indicated that China's currency actually seemed to be near its fair value. That didn't prevent politicians in America and elsewhere from keeping the pressure on China to allow its currency to appreciate faster, even as Chinese labour costs grew rapidly.

On Monday I said I was surprised there was so much hue-and-cry over Jack Conway’s campaign advertising when to my mind the ugly advertising story of this campaign is the endless parade of anti-Chinese demagoguery I’ve seen. The largest quantity of these ads seem to be from Democrats complaining about tax treatment of foreign corporate earnings, but the American right loves it some nationalism and has devised a whole range of its own China-bashing ads.