[MicoSiru]

There are a few watershedding news in this Global Financial Crisis.
China is seeking to reduce its dependence on USD as a reserve currency.
Are we seeing a transformational change in the way the world do business?

See this post and the next 2 postings




China Risks the Madoff Treatment From Treasuries: William Pesek

Commentary by William Pesek

Jan. 9 (Bloomberg) -- Beijing bookstores would be wise to stock up on Johann Wolfgang von Goethe. His work will help Chinese officials understand the “Faustian bargain” in which they are engaged with the U.S.

The reference here is to a compromise of principles for fleeting gains. In literature, Goethe’s Faust is a mythic German alchemist who made a deal with the devil. And that, in a nutshell, is where China, the biggest foreign holder of U.S. debt, finds itself as America re-inflates its economy.

Treasury Secretary Henry Paulson isn’t the devil, yet on his watch the U.S. has morphed into a huge debt-issuing machine. The Congressional Budget Office says the U.S. deficit will more than double this year to at least $1.18 trillion, the biggest since World War II.

Barack Obama has even bigger plans. The CBO’s estimates don’t include the cost of the president-elect’s stimulus package, which will probably add at least $750 billion to the total over the next two years. Last year’s shortfall totaled $455 billion. The U.S. needs China’s money more than ever.

“I spent most of the first two quarters of 2008 marveling at the pace of Chinese reserve accumulation,” Council on Foreign Relations economist Brad Setser in New York wrote on his Web log this week. “I expect to spend the first few quarters of 2009 marveling at the size of the U.S. fiscal deficit.”

Best Customer

All that borrowing could burst what Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., calls a market with “some bubble characteristics.” That isn’t escaping officials in Beijing.

China owns $653 billion of Treasuries, and indications are that it’s losing its appetite for U.S. debt. Expect Asia’s second-biggest economy to cut the share of dollars in its $1.9 trillion of reserves, and perhaps sharply.

The U.S. is, after all, acting at the expense of its best customer. Just as shareholders abhor companies diluting their stock with new offerings, China’s debt managers can’t be happy with the Treasury’s plans.

Along with its Faustian bargain, one wonders if China risks a Madoffian one, too.

No, the Treasury isn’t engaged in a massive fraud of the kind allegedly perpetrated by financier Bernard Madoff. Yet the U.S.’s $5.3 trillion government debt arena is looking more like a Ponzi scheme than a market.

Madoff’s Scheme

Madoff personifies the greed, lack of transparency and lost trust that has accompanied the U.S.’s fall from grace. Even though skeptics raised concerns about the veracity of Madoff’s performance over the years, regulators failed to act. They believed Madoff’s assertions and figures.

The reason credit-rating companies aren’t swarming around and threatening to downgrade the U.S. is trust. It’s a deep belief that the issuer of the reserve currency and one without foreign-currency debt will always make its payments. That doesn’t mean critics who say the market has become the world’s biggest pyramid scheme are wrong.

Holding the whole thing together is the idea that there will always be fresh money flowing in to save investors already there. A pyramid-scheme dynamic is very much at play. Treasury holders won’t lose everything the way Madoff’s investors might. Yet China will suffer when foreigners sell Treasuries and yields surge.

Sucker’s Bet

The question is how aggressively China will shield itself from what increasingly looks like a sucker’s bet. Economists at Deutsche Bank AG in Frankfurt, for example, estimate China will trim the share of dollars to about 45 percent this year from more than 70 percent in 2003.

Of course, having entered into this arrangement, China is hard-pressed to get out of it. Its economy is largely about selling manufactured goods overseas.

“I am not suggesting this model is irrevocable,” says David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut. “Like anything in economics, situations evolve. But in the midst of a global slowdown the world has not seen since World War II, now is not the time for China to throw out the existing economic model for a new one.”

Relying on domestic demand is a long-term goal that will require deft policy making and a high level of tolerance for disruptions in the short run. It’s not clear 2009 is the year to make that transition.

The best scenario for China is for American consumers to resume buying its goods. China has a vested interest in not doing anything to complicate things for the biggest economy. Pulling the plug on Treasuries would make headlines, precipitate a run on the dollar and hurt U.S. growth.

That doesn’t mean China wants to risk more money on a Ponzi scheme in its last throes. The world is littered with examples of how that can turn out. And China’s 1.3 billion people could sure use some of that cash back home as their own economy falters.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

Last Updated: January 8, 2009 17:55 EST

[MicoSiru]

Renminbi likely to be used as currency for forex reserves


www.chinaview.cn 2008-12-25 17:01:12


BEIJING, Dec. 25 (Xinhua) -- China's currency, Renminbi, is likely to join other international currencies to be used for forex reserves by other economies, according to Wu Xiaoling, former vice governor of the country's central bank and now the deputy head of the financial and economic committee under the top legislature.

Wu made the remarks in her article carried by the latest annual issue of the leading business magazine Caijing.

Wu wrote that China should make preparations in its economic structure and its financial regime for its currency to be internationalized.

Prior to making the Renminbi, also called yuan, a currency used for forex reserves by other economies, it may be allowed to be used for trade settlements between China and some other countries and regions, according to Wu.

In China's neighboring countries, there were calls for the yuan to be used to settle bilateral trade payments, she said. China has signed settlement agreements with eight neighboring countries, including Russia, Mongolia, Vietnam and Myanmar, assuming a voluntarily choice of settlement currency, she added.

Many were confident of the yuan and willing to settle trade payments in the Chinese currency, as it remained strong, Wu said.

"China should create conditions for the yuan to become an international settlement currency," she stressed.

It is necessary to expand and deepen the yuan-denominated financial markets and step up the process to realize the full convertibility of the currency and provide investment channels for yuan holders, according to Wu.

Some believed the reason why China was able to remain untouched in the 1998 Asian financial woes was because of its lack of full convertibility under capital accounts. And this was also the factor behind the fact that China has not been so seriously affected by the current global financial crisis.

Wu said China should not become "self-complacent and close itself from the outside world" because of its lack of full convertibility, which was "not a good thing". Otherwise, the country would be "at a disadvantage when the world economy stabilized and made a takeoff again," she added.

The Chinese Government has decided to allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta and the special administrative regions of Hong Kong and Macao.

Meanwhile, Guangxi Zhuang Autonomous Region and Yunnan Province will be allowed to use Renminbi to settle trade payments with ASEAN (Association of Southeast Asian Nations) members, according to a government announcement on Wednesday evening.

But the Government did not give any details of how and when the pilot currency program would start.

"The move will mitigate the risk of exchange rate fluctuations for Chinese exporters and their trade partners," Zhao Xijun, finance processor at Renmin University of China, was quoted as saying by Thursday's China Daily.

Most of China's external trade is settled in U.S. dollar or the euro at present. But, the paper said, many analysts predicted the dollar might depreciate substantially in the coming years because of the ailing U.S. economy.

"The move will also increase the yuan's acceptance in Asia, which will help it become an international currency in the long run," Zhao told the paper.

The yuan's acceptance has been rising in recent years, thanks to the nation's economic prowess and its 1.9 trillion reserves of foreign exchange, according to the paper.

[MicoSiru]

China to begin yuan-settlement trials
www.chinaview.cn 2008-12-25 20:58:07

BEIJING, Dec. 25 -- The yuan will be used in transactions with neighboring trade partners as part of a pilot project - in what could be the first step on the road to making it an international currency.

The yuan will be allowed to be used for settlement between the Pearl and Yangtze river delta regions and the special administrative regions of Hong Kong and Macao, the State Council, or the Cabinet, said in a statement yesterday.

The Guangxi Zhuang autonomous region and Yunnan province will be allowed to use the yuan to settle trade payments with ASEAN (Association of Southeast Asian Nations) members.

The pilot program was announced with a raft of other measures designed to help bolster the nation's export sector. The State Council did not give details of how and when the currency project would start.

"The move will mitigate the risk of exchange rate fluctuations for Chinese exporters and their trade partners," said Zhao Xijun, finance professor at Renmin University of China.

The lion's share of China's foreign trade is currently settled in US dollars or the euro. But many analysts predict the greenback might depreciate substantially in the coming years because of the ailing US economy.

Earlier this month, Zhou Xiaochuan, governor of the central bank, said in Hong Kong that settlements using the US dollar would cause problems if the dollar's value fluctuates drastically.

The mainland's trade with Hong Kong, Macao and ASEAN nations has been rising rapidly over the past years to reach $402.7 billion last year, or 20 percent of the mainland's total trade volume.

"The move will also increase the yuan's acceptance in Asia, which will help it become an international currency in the long run," said Zhao.

The yuan's acceptance has been rising in recent years, thanks to the nation's economic prowess and its $1.9 trillion reserves of foreign exchange. Over the past year, there has been a growing advocacy at home to make the yuan a global currency, since the weakening of the greenback has caused hefty losses to China's forex reserves.

But the government has been cautious about moving in that direction, which would also require the yuan to be freely convertible. Analysts say it will take time for policymakers to make the shift as they try to maintain the stability of the currency regime.

The government has made a series of moves in recent months to expand the use of the yuan beyond its borders, which some say would benefit its slowing export sector.

The mainland signed a currency swap deal with Hong Kong on Nov 20. Earlier this year, the government also gave the go-ahead to let Chinese banks issue yuan-denominated bonds in Hong Kong.

(Source: Chinadaily)

[ingeneensueva]

when you are the world factory for most of the product.. it makes sense to use your own currency at the mainstay.

in this aspect, RMB will only go one way against the USD. North.