

The yuan is displacing the dollar as a key currency - JumpCrisscross
http://www.economist.com/news/finance-and-economics/21564880-yuan-displacing-dollar-key-currency

======
lkrubner
China will not replace the USA as the central economic power, even if the
economy of China exceeds that of the USA. Step back from the details for a
moment and think about great economic centers when they are at the peak of the
power. Is there any generalization we can make that is true of all
civilizations, in all centuries, and for which we have fairly detailed
records, even going back thousands of years? Yes, there is at least one
generalization that we can make with confidence: each center, when it was at
its peak, was a place where foreign merchants felt safe and comfortable. Does
that hold true today in China? Do foreign merchants feel they can make deals
as equals with the native Chinese merchants? Can foreigners trust that the
Chinese courts are fair and neutral and unbiased?

Islam was at it peak in the 800s and 900s, and during that time Jews,
Christians, Hindus and other groups, which had been hated in the past and
would be hated again in the future, were all welcome.

Venice was at its peak in the 1400s, and muslims merchants felt safe there,
despite the strong anti-muslim sentiment in much of Europe at that time. The
same holds true of Amsterdam when it was at its peak in the 1600s.

As for England, as it reached its peak in the 1700s, we have Voltaire's famous
description:

"Go into the Exchange in London, that place more venerable than many a court,
and you will see representatives of all the nations assembled there for the
profit of mankind. There the Jew, the Mahometan, and the Christian deal with
one another as if they were of the same religion and reserve the name of
infidel for those who go bankrupt. There the Presbyterian trusts the
Anabaptist, and the Church of England man accepts the promise of the Quaker.
On leaving these peaceable and free assemblies, some go to the synagogue,
others in search of a drink; this man is on the way to be baptized in a great
tub in the name of the Father, by the Son, to the Holy Ghost; that man is
having the foreskin of his son cut off, and a Hebraic formula mumbled over the
child that he himself can make nothing of; these others are going to their
church to await the inspiration of God with their hats on; and all are
satisfied."

I am using the phrase "economic center" in the sense that Fernand Braudel uses
it in his book "The Perspective Of The World":
[http://www.amazon.com/Perspective-World-Fernand-
Braudel/dp/0...](http://www.amazon.com/Perspective-World-Fernand-
Braudel/dp/0006860796/ref=la_B000AQ3IK8_1_7?s=books&ie=UTF8&qid=1351185475&sr=1-7)

He does not use the phrase to mean "the biggest economic power", though often
the center is the biggest economic power. But he also applies it to Antwerp in
the 1500s, when the religious wars were at their peak, and when, despite the
wars, southern Europe and northern Europe needed to find a way to trade with
each other, and market and political forces established Antwerp as the center
of trade in Europe, because it was a northern city still mostly under Spanish
control -- the perfect meeting place of north and south.

I am not saying that the USA will always be the center of the world economy.
But I am saying that the next center will be open to the world, in the same
way that previous economic centers were. China is not currently open to the
world in the same way. It would take a political revolution as big as the one
in 1949 to transform China into the kind of open political entity that former
economic centers have been.

And can a nation really have the dominant currency if it is not the central
economic power? It is reasonable to say that Chinese yuan will become more
important over time, but this title implies a larger change: "The yuan is
displacing the dollar as a key currency". If the implication is that the yuan
will actually replace the dollar as the dominant reserve currency, then that
implication is probably false. Politics plays a large role in these shifts,
not just economics.

~~~
grecy
> Do foreign merchants feel they can make deals as equals with the native
> _American_ merchants? Can foreigners trust that the _American_ courts are
> fair and neutral and unbiased?

As a foreigner, I feel somewhat qualified to answer that question.

No. Categorically, no.

~~~
JumpCrisscross
The corruption perceptions and international ease of doing business surveys
and rankings would provide more statistically significant evidence to counter
your anecdote. Note that competition is relative - we may find the U.S. courts
deplorable on specific issues but they _do_ turn out a measure better than
most other economic powers' courts, e.g. China, Russia, or Brazil.

~~~
bduerst
...but not much.

The U.S. is ranked 24 out of 180 on the corruption index. While this isn't the
level of China or Brazil, it's not exactly rosy either.

~~~
tptacek
Did you look at the actual data behind this survey? I just did, and it's a
little sketchy.

The US ranks alongside the rest of Europe for most of the data sources that
include the US (many of TI's data sources do not), except for two surveys
which sharply differ:

* TI's own "Bribery Payer's Index", which gives the US a 4.6 out of 10 (a score more compatible with Southeast Asia than North America) in the crosstabs, but for which the actual TI BPI report gives results back in line with Europe.

* IMD's survey from 2010, which gives the US a 6.5 (again, significantly lower than Europe) but for which no actual data appears to be publicly available.

In both cases, the actual data extracted from these surveys (the TI index is a
meta-analysis of many surveys; a survey of surveys) is "phone surveys to
business leaders"; TI has selected specific questions from these surveys as
indicative and discarded the rest of them. In the IMD case, for instance,
there appears to be one question at all that's selected from the survey: "Is
there bribery or corruption, yes or no".

A 6.5 score from the IMD report puts the US in the 6-7 band along with
Estonia, Malaysia, Spain, and Israel. This seems like an extraordinary claim,
as is the claim that there is less bribery in Qatar and Chile than in the US.

Similarly, the 4.x score in the BPI survey puts the US in a band with China,
Russia, the Czech Republic, the Philippines and Argentina. This _is_ an
extraordinary claim, requiring extraordinary evidence.

If you excluded the BPI and IMD surveys from the data set, the US would
probably be duking it out for tenths of a point at the top of the list with
the rest of Europe. As it stands, we're simply in the top quintile, unlike
China.

~~~
bduerst
I agree that this is an extroidinary claim, but it is technically named as the
_Corruption Perception Index_ , which is relevent to the discussion about the
perception of organizations doing business in different countries.

The real question is: Is there any other data on this scale to refute or back
this research?

------
bitcartel
The correlation in currency movement is most likely a result of concrete steps
taken by China over the years to reduce the need for an intermediate currency,
traditionally the USD, in trade between two countries.

There's plenty of evidence that the seeds have been planted for a free-
floating (potentially gold-backed) Yuan to eventually sit alongside (not
necessarily displace) the Euro and USD as a major reserve currency.

January 2012: "Sheikhs fall in love with renminbi"

<http://www.atimes.com/atimes/Middle_East/NA24Ak03.html>

March 2012: "China has signed a $31bn currency swap agreement with Australia,
a step towards boosting the renminbi’s profile in developed markets. Beijing
has established nearly 20 bilateral swap lines over the past four years, but
Australia ranks as the biggest economy yet to sign such a deal"

[http://www.ft.com/intl/cms/s/0/4b6c4ab6-7404-11e1-bcec-00144...](http://www.ft.com/intl/cms/s/0/4b6c4ab6-7404-11e1-bcec-00144feab49a.html)

April 2012: "This morning, we saw the launch of the first RMB bond outside of
Chinese sovereign territories. And it happened here in London. This builds on
the progress London has already made toward becoming the western hub for RMB.’

[http://citywire.co.uk/global/london-launches-its-first-
offsh...](http://citywire.co.uk/global/london-launches-its-first-offshore-
renminbi-bond/a582756)

June 2012: "China and Japan began direct trading of Chinese yuan and Japanese
yen in Tokyo and Shanghai on June 1, in a move to boost trade and investment
between the world's second- and third- largest economies, and also viewed as a
further step to enable the yuan to become a truly global currency."

[http://news.xinhuanet.com/english/china/2012-06/04/c_1316294...](http://news.xinhuanet.com/english/china/2012-06/04/c_131629478.htm)

June 2012: "China and Brazil strike $30bn bilateral swap deal to reinforce
economies. Announcement also includes plans for joint satellite launches,
culture centres and language networks

[http://www.guardian.co.uk/world/2012/jun/22/china-brazil-
bil...](http://www.guardian.co.uk/world/2012/jun/22/china-brazil-bilateral-
swap-deal)

August 2012: "ZIMBABWE has been urged to follow the example of some Central
African countries which have taken the initiative in using the Chinese
currency - the yuan. Last month a number of Central African banks were given
access to yuan-denominated bonds by the China Development Bank Corporation
(CDB)."

<http://allafrica.com/stories/201208160818.html>

October 2012: 'Chinese Gold Imports Through August Surpass Total ECB Holdings,
Imports From Australia Surge 900%"

[http://www.zerohedge.com/news/2012-10-21/chinese-gold-
import...](http://www.zerohedge.com/news/2012-10-21/chinese-gold-imports-
through-august-surpass-total-ecb-holdings-imports-australia-sur)

~~~
luser001
Hmm, what evidence do you have that China wants a gold-backed yuan? AFAIK,
yuan is at present a fiat currency.

~~~
squidsoup
Isn't the notion of a gold backed currency considered antiquated now? My
understanding is that both the US dollar and Euro are fiat currencies as well,
the US dollar having abandoned the gold standard in the 70s
(<http://en.wikipedia.org/wiki/Nixon_Shock>).

~~~
bitcartel
This week's edition of Forbes:

[http://www.forbes.com/sites/steveforbes/2012/10/03/gold-
can-...](http://www.forbes.com/sites/steveforbes/2012/10/03/gold-can-save-us-
from-disaster/)

------
endersshadow
As the article mentions, most of the emerging economies that are starting to
be affected more by the yuan than the dollar are in East Asia. That only makes
sense, anyway. The dollar isn't being displaced as a key currency, it's losing
some prominence in emerging markets--which, if they're ever to emerge, will
float freely, anyway. It's exactly what you'd expect.

~~~
bduerst
Shanghai is also poised to replace Singapore as the Financial hub of the east.

------
adestefan
25 years ago they said this about the yen.

10 years ago the Euro was going to take over the world.

Now the yuan is the enemy even though people still flock to the dollar even
with interest rates near 0%.

~~~
Atropos
Don't count out the Euro just yet! From Wikipedia reserve currencies: \- 1999:
USD 71.0%, Eur 17.9% \- 2012: USD 62.2%, Eur 25.0%

Sure the next 5-10 years might be worse for the Euro, but for things like a
global reserve currency one should think in 50+ year frames anyway...

~~~
mey
The basis of the Euro is on a multi-state entity with closed books and little
regulation. This basically means the liability of any single country can
impact the whole of the EU and by extension the Euro. Until the EU makes a
part of membership, approval oversight on all member country budgets, the
stability of the Euro is a bit fractured. (Getting oversight is something the
countries generally refuse on the non-incorrect grounds of state independence,
but then why join a combined currency in the first place? UK got it sorta
correct)

And for clarity, the reason I see the multi-state being an issue is, it is
slow to act to resolve issues or expose issues, since resolving issues takes a
combined intent and single states have little incentive to keep their books
correct publicly (plenty of upside, little downside).

While I don't see the dollar being the world currency forever, I also don't
see it needs to be.

------
w1ntermute
It's pretty obvious that neither the Republicans nor the Democrats are willing
to cut down on spending enough to start chipping away at the national debt.
Hopefully the (partial) weakening of the greenback's status as the world's
primary reserve currency will force them to take action.

~~~
slurgfest
It's obvious that the Republicans and Democrats TOGETHER can't do it. Either
party has things they'd be happy to cut (extra healthcare, extra military,
extra tax cuts) - it's the combination of both together that are making the
deadlock.

Also, it is mathematically as much a problem of not raising revenue as it is a
problem of cutting spending. Strange that you did not mention this.

It isn't at all obvious that the level of the national debt is the only issue
influencing the dollar's usage as a reserve currency.

~~~
nazgulnarsil
yes, the solution to wild spending is always to cast a critical eye at how to
extract yet MORE of the US GDP to spend on garbage.

------
russtrpkovski
SDR (Special drawing rights) will displace the dollar before the yuan does.
SDRs are instruments created by the IMF that represent a basket of currencies
held by IMF member countries.

The yuan currency market is too small and illiquid to displace the dollar as
the world's reserve currency.

~~~
RickHull
I doubt that SDR will ever replace the dollar. From wikipedia:

> _Special drawing rights were created by the IMF in 1969 and were intended to
> be an asset held in foreign exchange reserves under the Bretton Woods system
> of fixed exchange rates. After the collapse of that system in the early
> 1970s the SDR has taken on a far less important role.[5] Acting as the unit
> of account for the IMF has been its primary purpose[Williamson 1] since
> 1972._

> _Private parties do not hold or use them._

~~~
russtrpkovski
Who knows how it will play out. I read a fascinating book on the topic. The
author is bullish on SDRs.

[http://www.amazon.com/Currency-Wars-Making-Global-
Crisis/dp/...](http://www.amazon.com/Currency-Wars-Making-Global-
Crisis/dp/1591845564/ref=sr_1_1?ie=UTF8&qid=1351185057&sr=8-1&keywords=currency+wars)

------
wutbrodo
The article seems to be looking at trends from the crisis years vs the pre-
crisis years. It seems odd that it'd leave out any consideration of the fact
that there's been a substantial amount of uncertainty in the global economy of
the last couple years, and that whenever the economy seems like it's heading
for trouble, the dollar gains and less "safe" currencies (the rupee et al)
decline. One would think that would at least have a significant effect on the
fact that the correlation between the dollar and developing world is shifting.

------
patrickgzill
They are certainly trying... however, Iran-Dubai-Turkey triangle consists of
gold.

[http://www.zerohedge.com/news/2012-10-23/how-iran-evades-
wes...](http://www.zerohedge.com/news/2012-10-23/how-iran-evades-western-
blocakde-turkey-dubai-iran-petrogold-triangle)

And it lets Iran sell its oil to others pretty easily.

~~~
ihsw
Gold trade has features that are similarly key to bitcoin trade: immune to
inflation, anonymous, and untraceable. Could BTC supplant Gold as a currency
in that regard?

~~~
patrickgzill
Gold functions without electricity, so, I doubt it.

------
rolux
There is one important aspect that the article doesn't address, which I think
would be a crucial element in any strategy to dethrone the US dollar:

<http://www.google.com/search?q=yuan+oil+china+iran>

~~~
camus
right night one needs dollars to buy oil from the "cartel" ... when one
decides one wants to use euro or yuans one finishes like Saddam or Gadafi ...

~~~
jrockway
r/nonsensical-conspiracy-theories is that way.

~~~
rolux
While I don't think the post you're referring to offered any deep insights,
it's definitely not a conspiracy theory to state that the ability of the US to
sustain their deficit spending largely depends on the dollar remaining the
default currency of the global oil trade, and that maintaining this status quo
is one of the key missions of US foreign policy. As such, it's one of the
factors that determine US military presence, or interventions.

------
ljlolel
Yea right. Wait until a crisis and watch all the wealth flood into dollars.

------
kylelibra
At what point did the dollar become the standard? Post World War 2 I'm
guessing? What was the equivalent before? Anyone know?

~~~
johnsang
It was after bretton woods.

<http://en.m.wikipedia.org/wiki/Bretton_Woods_system>

~~~
kylelibra
That was exactly what I was looking for, thanks!

------
jvm
> The yuan is displacing the yen as a key currency in Asia

FTFY (well, at least fixed that for the Economist headline writers)

------
tsotha
Uh huh. I think I read this same article a few years back, only instead of
yuan it said euro.

------
aioprisan
didn't they say the same about the Euro and the mighty strength of Europe that
has a bigger GDP than that of the US, yet look where they are now..

