IS THE CHINESE YUAN A THREAT TO US DOLLAR SUPREMACY?
Amid the many “if” and “what” questions now hovering over our heads with regard to the West Philippine Sea conflict, there are even bigger “if” and “what” questions we should also be wary of affecting the global economy in general, and China Us relations in particular.
Among them are, what would happen to the US dollar if the Chinese Yuan is included in the currencies with Special Drawing Rights (SDR) by the International Monetary Fund (IMF)? And what would the US do to protect its dollar?
The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies namely the euro, Japanese yen, pound sterling and the US dollar which can be exchanged for freely usable currencies. As of September 10, 2015, 204.1 billion SDRs were created and allocated to members (equivalent to about US$280 billion).
And should the yuan be confirmed as an SDR currency and given international exchange status, it will not only create greater interest in the yuan by the international markets and financiers, but it will also provide the yuan a level playing field with the four (4) other SDR currencies. As the second largest economy, which reportedly has US$ 3.1 trillion in reserves while the US is in the hole, the scenario could be horrifying for the Americans.
Is China Preparing for the Big Day?
Speculations are rife that the yuan’s inclusion in the SDR basket of currencies will shake, if not rock, the global financial markets. And some international financial experts believe that China has been preparing for that day a long time ago, noting the recent devaluation of the yuan. While the rest of the economic powers were suffering from negative balances of trade, China was comfortably enjoying and continues to post a positive trade balance.
According to recent reports, in 2008, for instance, the US imported $806.7 billion worth of goods and services more than it exported to China. In 2013, however, the deficit fell to only $400.3 billion. For China, on the other hand, its $420.5 billion exports to the US posted a positive surplus of $182.8 billion. And while the U.S. dollar gained nearly 20% against the U.S. dollar index currencies from 2008 to 2014, it collapsed almost 15% against the Chinese yuan.
The recent devaluation of the yuan further boosted China’s dominance in the export market, even as its lower labor cost continues to attract foreign investors. With the yuan’s inclusion in the SDR, this could strengthen China’s hold in the export market as the yuan will already be an international exchange currency, effectively challenging and eventually downgrading the US dollar’s supremacy in global foreign exchange.
China has bided its time rather well. And its aggressive shoring up of gold reserves, in preparation for the “big day” when it declares the value of its reserves as “hard” currency back up for the yuan, gives us more reason to ask: “What would, should or could the US do to protect the US dollar?”
In the interest of full disclosure, I will state as a matter of public record that I have filed at the Department of Justice (DOJ) a cartel case against LPGMA, perhaps among the few, if not the first, cartel case that was given due course by the DOJ. That case remains under litigation.