4/23/2012 7:58 PM ET|
Is the yuan the new dollar?
As China's currency becomes easier and easier to trade, and as its economy grows, it is becoming an alternative to the greenback. Here's how investors can play the trend.
Throughout the global financial crisis -- even as the problem changed its focus (and name) from the U.S. mortgage-backed securities crisis to the eurozone debt crisis -- the United States could find solace in the strength of the dollar.
It may not have been a currency backed by the largest gold reserves or a well-run fiscal policy, but it needed only to be less bad than its global competitors. And up against a euro that threatens to come apart and a yen backed by a Tokyo government with an even bigger debt problem than Washington has, the dollar looked good enough.
For liquidity, for the depth of its markets and for its ease of transfers and payments, the dollar was relatively strong, because the competition was relatively weak. The dollar was a global currency without real competition. That's been critical to allowing U.S. Treasury prices to rally and yields to fall even after the country lost its AAA credit rating.
The dollar isn't without long-term competitive threats, however. The most obvious of those has long been the Chinese renminbi, or yuan. (China's currency is named the renminbi. The units of the renminbi are the fen, jiao and yuan. It takes 10 fen to make a jiao, and 10 jiao make a yuan. It's as if the U.S. currency was named the dollar, but its units were called the George, the Alexander and the Benjamin.) But that threat, while acknowledged as real, has always seemed very, very distant.
Well, I think it's time to at least take one "very" off the timeline. China is moving more quickly than expected to turn its currency into a true global alternative.
How far can it go?
It remains to be seen if the Beijing government can bring itself to give up the kind of control over its currency that would be necessary to turn the renminbi into a real alternative to the dollar. China's economic policies are so grounded in the government's ability to control the exchange rate, and the flow of its currency in and out of the country, that the renminbi may never gain the currency market share that China's economy and reserves could otherwise command. But the global financial crisis -- and the damage suffered by the euro, which had looked like a true alternative to the dollar before the European debt crisis -- has pushed Beijing into action faster than projected even just a year or two ago.
Any real challenge to the dollar from the renminbi isn't going to come tomorrow. But I don't think investors should take the long-term supremacy of the dollar for granted. The likelihood of slippage in the dollar's global role has implications for global stock and bond markets, for U.S. interest rates and for U.S. economic growth rates that you should at least consider in formulating any long-term investment plan.
The latest move -- announced just last week and set to take effect in the third quarter of the year -- is, to me, a bombshell that indicates just how quickly the currency game is changing for the renminbi. (It also suggests a few stocks you might want to consider for your portfolio to take advantage of the long-term currency trend.)
But first: What happened last week?
The yuan on the block
Hong Kong Exchanges and Clearing (HKXCY), trades as 388.HK in Hong Kong but is very thinly traded in New York. The company, which owns and operates the stock and futures exchanges in Hong Kong and related clearinghouses, announced plans to launch the first yuan-denominated futures in the third quarter of 2012. The new product would allow investors to trade against the dollar in contracts priced at $100,000.
Nothing new there. Lots of markets offer futures based on the U.S currency. But this is new and an important change: The contracts will require delivery in dollars by the seller and payment in yuan. In essence, then, the futures allow for the convertibility of dollars and yuan.
The move is another step in China's project of creating a global offshore market for trading renminbi, which really got up to speed with the creation of an offshore market for renminbi in Hong Kong in mid-2010. Until then, the buying and selling of yuan had been largely limited to mainland China under the government's strict currency controls. From July 2010 to January 2011, daily trading in Hong Kong grew from zero to the equivalent of $400 million. Still a drop in the global bucket, but China didn't stop there.
In January 2011, for example, the state-controlled Bank of China allowed customers to trade yuan in the United States. The move was an endorsement of the expansion of yuan trading by Beijing, but it came with the typical truckload of restrictions. Businesses can convert any amount of currency, as long as they are engaged in international trading, but U.S.-based individual customers were limited to $4,000 a day.
In August 2010, McDonald's (MCD) became the first foreign nonfinancial company to sell yuan-denominated bonds in Hong Kong. Since then, Caterpillar (CAT) and Volkswagen (VLKAY) have joined a parade of companies raising capital in yuan-denominated bonds in Hong Kong. In spite of a slump in issuance in the fourth quarter of 2011, the value of new so-called dim sum bonds reached 104 billion yuan -- $16.4 billion. That's almost triple the offerings in 2011.
In December 2011, China and Japan agreed to conduct future bilateral trades directly in yuan. (In 2011, trade between China and Japan amounted to $350 billion.) Before the agreement, Japanese companies, like those from most other countries, had to convert payments into dollars and then into yuan. Each conversion imposed trading costs and exposure to currency fluctuations.
The real big bang, though, is scheduled for 2014, according to the People's Bank. That's when China will roll out a system that would allow countries to settle payments for Chinese goods in yuan instead of dollars. With higher volumes will come lower costs -- in the current system it costs more to do cross-border transfers in yuan than in dollars. That cost differential isn't likely to persist for long, given the volume of its China's global trade. International trade settled in yuan was just $371 billion in 2011.
More from MoneyShow.com:
VIDEO ON MSN MONEY
Well it comes down to this....
Do you have faith in Yaun or the Ben Bernache Dollar that loses value daily? I think $1600+ Gold and Silver at $30+ an ounce answer that question. No one wants dollars. They buy stocks, Commodities, foreign currency.... They will dump dollars, bonds, treasuries and real estate...
If you had held dollars the last 30 years, the are now worth under 20 cents each in 1980 dollars... And we have not paid off a dime in principle in 60+ years... We have become deadbeats...
The rich big buisness owners of this country, and the rich "screw every one over for a dollar" people of this country have destroyed the U.S.
The idea of working hard and being rewarded is over. Some of the wealthy folk of our nation decided to use loopholes and scams to make themselves even wealthier by completely destroying the economy of our nation. They then proceeded to blame the poorer people for not working hard enough, they expected every one who worked their whole lives to build up to a decent sallary to just go, "hey i should work for 5 bucks an hour because its the right thing to do."
They are so out of touch that they call the poor, animals that only breed if they are fed and should not get any assistance. They have their mansions and their play money but they never earned it. They chastize us for not working but most of them inherited their money, they never worked a hard labor job in their life and you will be hard pressed to find one of their children flipping burgers at mcdonnalds.
They are so sure that we should all have the finer things in life working minimum wage jobs. They pretend to care, they "create" 10 thousand jobs while the lay off 100 thousand jobs and sent those jobs to third world countries. They whine and say well we only started a buisness to make a profit, not bothering to mention that for decades they have been making millions or billions of dollars worth of profit. So where does it end? Why is 100 million dollars not enough to live off of that they need to destroy the economy of the entire United States just to make a few more million?
They played this country to serve them, they instituted all of the policies and laws that have made them money while we all go bankrupt. The reason China owns us, and the reason their country will be the driving force in world economy from now on, is because the rich of this country decided that their interests were more important than our interests. Because they thought that 5 million a year bonuses were not enough that they deserved 10 million a year for sitting behind a desk or going golfing or going hob nobbing all over the world.
They have never had to lift any thing heavier than a pen. The people that actually earn the money for them dont get **** but unemployed and all the jobs go to some poor country where the wealthy folks can exploit children and other poor people to make them the money. What a shame, what a great country we used to have. Now its just a toy for the wealthy to play with on a whim.
You wonder why china is doing so well? well its because we pay them to give us everything, and we borrow from them for everything. The US cant pay it back, we wont pay it back, and when china rightfully comes calling they have well over a billion people to our 300 million. They will win and we will lose and this great country will be the third world dump for china that mexico is for us.
Democacy is dead in this country, its been replaced by industrialised commercialism every candidate is in the pocket of some corporation some where and every citizen is thought of as a tool to make more money for the top 1 percent. We are doomed they are doomed, the rich havent thought far enough ahead to wonder what it means to be a billionair when a billion dollars wont buy a loaf of bread. So sad, we had a great country once, we tried. Our elected leaders let us all down. Corruption ruined the chances that our country had. And Republicans are leading the charge down the drain.
Democrats are doing the same thing though. Good luck America, the people are still great, the leadership not so much. Hope we can get passed the religious ideas the 2 or 3 main hot beds of debate and focus on the real issues some day. But I guess life begins at hitting play on the porno is more important than what this country will do in the next couple years to ensure that it still exists.
Wake up, people. We need some leadership and we need it now, not in some distant administration yet to be elected.
Demand better from our corporate-paid help in Washington.
That's right America. Thanks to stores like Walmart, Harbour Frieght and others, China is taking over the monetary market. Buy U. S. damn it!
THE YUAN IS NOW IN BED WITH THE DOLLAR AND HAS REDUCED WASHINGTON TO
RUNNING A PONZI SCHEME THAT MAKES BERNIE MADOFF SEEM LIKE A PIKER.
IMAGINE THAT THE PONZI SCHEME THAT SENT HIM TO JAIL FOR THE REST OF HIS LIFE,
AND THEN SEND THE POLITICIANS IN WASHINGTON RECEIVING THE SAME SENTENCE
FOR THEIR MANIPULATING THE DEFICIT BY ROLLING OVER GOVERNMENT DEBT BY
ROLLING OVER MATURING NOTES THAT COME DUE WITH NEW GOVERNMENT NOTES
IN A ROLL OVER TRANSACTION. NOW THERE ARE FINANCIAL TRANSACTIONS THAT
WOULD MAKE MR. PONZI PROUD AND HAVE REACHED LEVELS THAT IN HIS WILDEST
DREAMS HE WOULD NEVER IMAGINED ACHIEVING.
Take away the incentives of the decision-makers and you'll have nothing. It may not be perfect, but capitalism is the best system in the world.
Democrats are doing the same thing though. Good luck America, the people are still great, the leadership not so much. Hope we can get passed the religious ideas the 2 or 3 main hot beds of debate and focus on the real issues some day.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market ended the holiday-shortened week on a mixed note as the Dow Jones Industrial Average shed 0.1%, while the S&P 500 added 0.1% with seven sectors posting gains.
Equity indices faced an uphill climb from the opening bell after disappointing quarterly results from Google (GOOG 536.10, -20.44) and IBM (IBM 190.04, -6.36) weighed on the early sentiment. Google reported earnings $0.15 below the Capital IQ consensus estimate on revenue of $15.42 ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'