FIIA News reports about Rise of the renminbi as a global currency.

(emphasis mine) [my comment]

[NEW GLOBAL FINANCIAL ORDER] Rise of the renminbi as a global currency
The Korea Herald
February 9, 2009

If you travel in Southeast Asia, you will notice that the Chinese renminbi (yuan) is frequently circulated as a means of payment in everyday business. Recently, across this region, the renminbi has been regarded as another hard currency after the U.S. dollar and the Japanese yen. In fact, China is the largest trading partner of many Asian economies, and has become an increasingly important source of investment in the region.

In the last decade, the renminbi has already been used in settlements of border trade between China and some neighboring countries, and the renminbi banknotes are accepted by shops in many tourist places in the region.

In northeast areas of Laos, where it borders China, the renminbi can completely replace the local currency, and the renminbi is circulated even in the capital city of Vientiane. It is known that border trade between China and Myanmar has recorded a renminbi cash flow of over 1 billion yuan ($146 million) each year. In Vietnam, the renminbi is circulated all over the country, and the National Bank of Vietnam provides a renminbi deposit service.

The renminbi is also circulating in the five Central Asian countries, as well as Russia and Pakistan. Among the Central Asian countries, the Kazakhstan cross-border circulation of the renminbi is the biggest, being estimated at about 1 billion yuan.

In Mongolia, banks provide a renminbi deposit service. In border trade between China and Mongolia, of course, the renminbi is used as a means of payment.

Outflows and inflows of the renminbi in China's neighboring countries were around 771 billion yuan in 2004. Therefore, it can be said that in trade activities between China and its neighboring countries, the renminbi has so far served, at least partially, as a sort of regional settlement currency.

Reflecting these economic realities, China has already signed settlement agreements with eight neighboring countries, including Russia, Mongolia, Vietnam and Myanmar, assuming a voluntary choice of settlement currency.

The renminbi is also now used in trade settlements in some cases. For example, COSCO Corp. (Singapore) Ltd., a Singapore-listed Chinese shipbuilding company, and COSCO HK, announced earlier last year that they would enter into sales contracts with the renminbi instead of the U.S. dollar, in order to minimize the effect of appreciation of the renminbi and to implement stringent control on the operating cost.

Since China introduced exchange rate reform in July 2005, the renminbi has appreciated about 20 percent. With the continuous appreciation of the renminbi, more and more Chinese exporters are beginning to make some contracts with the renminbi to avoid adverse effects of drastic fluctuations in the value of the U.S. dollar. Thus, COSCO Corp. is not the only large international company to make such arrangements.

Also statistics released by alibaba.com, China's leading e-commerce company operating the world's largest online marketplaces for both international and domestic suppliers, show that most of its about 70,000 Chinese suppliers have quoted in the euro, the British pound, the Australian dollar, or the renminbi, instead of the U.S. dollar, when settling transactions with companies outside the United States. It is not surprising that as long as the renminbi keeps appreciating against the dollar, more and more companies will choose to settle in renminbi.

At present, in addition to a huge trade surplus, great appreciation pressure on the renminbi driven by large capital inflows is to a large extent due to a positive speculative outlook of China's economy and purchase of yuan-denominated assets by foreign companies and individuals.

If this tendency persists in the future, it will surely contribute to the internationalization of the renminbi, and this phenomenon clearly establishes that an international currency is ultimately a market choice. This fact also indicates that prior to making the renminbi a currency for foreign exchange reserves by other economies, the renminbi, as an international currency, is used mainly for trade settlements between China and other countries and regions.

Recent developments

On Oct. 24, 2008, the seventh Asia-Europe Meeting (ASEM 7) was held in Beijing. Sixteen Asian and 27 European countries joined this summit meeting and held a high-level intergovernmental forum to confront an unprecedented financial crisis and to promote Asia-Europe cooperation.

Recently, the U.S.-born credit crunch has set up a worldwide financial crisis. It is evident that only joint and concerted efforts from the international community as a whole can succeed in coping with the current financial difficulties.

Coincidentally or not, on Oct. 24, 2008, the front-page commentary in the overseas edition of the People's Daily reported professor Shi Jianxun's opinion on how to address the current financial crisis. In China, the professor at Shanghai's Tongji University is famous for his harsh and anti-American criticism. He has before been strident in his criticism of the United States.

In the People's Daily, he suggested the urgent necessity to change the current global financial system and shockingly enough, he even advanced his opinion that Asian and European countries should collaborate to end U.S. dollar dominance and should settle in euros, yen and yuan.

The People's Daily is a government organ of China's leadership. But the Chinese-language overseas edition has a small-circulation offshoot. So its pronouncements do not necessarily represent party leadership's views.

It is, therefore, not so clear whether or not a more or less radical viewpoint by Shi would be published just prior to the spotlighted event of the ASEM 7 summit meeting in Beijing without the approval of China's leadership. But this commentary evidently shows the Chinese leadership's disdain for U.S. economic policies and global financial dominance in the wake of the worldwide credit crisis.

Recently the Wall Street Journal reported a similar story. It said that leaders in China have been surprised and upset over how much the problems in the U.S. financial sector have hurt China's investments in the United States. Chinese leaders were reportedly shocked in July and August last year as they learned that its investments in the government-sponsored enterprise bonds such as Fannie and Freddie were not safe. A GSE bond is generally perceived to have the same risk as a government bond, which is essentially near zero risk.

Chinese leaders, who had not known in detail how China's reserves were being invested, learned for the first time that the country's exposure to debt from those two companies totaled nearly $400 billion. So, China reportedly demanded and received regular briefings about the GSE bonds by the mortgage giants from high-level Treasury Department officials.

According to the WSJ, fearing the U.S. government's poor backup on its U.S. investments, Beijing is reexamining its policy according to people familiar with the government's views. [China has begun to sell of its agency holdings.]

Breaking dollar hegemony

The first step in redirecting China's policy focus on domestic development is for China to free itself from dollar hegemony. This can be done by legally requiring payment of all Chinese exports to be executed in the renminbi. [This would crash the dollar]

Such a policy affects only Chinese exporters and can be implemented unilaterally by Chinese law as a sovereign nation, without any international coordination or approval from foreign countries.

Importers of Chinese goods around the world will then have to acquire the renminbi from the Chinese State Administration for Foreign Exchange to pay for imports from China. The yuan exchange rate and Chinese export prices can then be coordinated according to Chinese domestic conditions. Import prices denominated in yuan can then be more rationally linked to Chinese export prices. Foreign trade for China then will benefit the renminbi economy rather than the dollar economy. There will be no need for China's central bank to hold dollar reserves any longer. [Agreed, but even more, there would be no need for ANY central bank to hold dollars.]

So, since late December 2008, China has approved a pilot program allowing the renminbi to be used officially in trade deals between China's selected provinces and their overseas trade partners. The trial program involves transactions between the Pearl River Delta and the Yangtze River Delta provinces and the special administrative regions of Hong Kong and Macao, as well as between the Guangxi Zhuang Autonomous region, Yunnan province, and Association of Southeast Asian Nations countries.

But this move seems to have a limited impact on some regions, thus the renminbi should be more accurately referred to as a local currency instead of an international currency.

Secondly, according to Wu Xiaoling, former vice governor of the central bank and now head of the financial and economic committee under its top legislature, China's renminbi is likely to be used as currency for foreign exchange reserves by other economies eventually. [Agreed]

But it could take a much longer time than is expected for the renminbi to be everyone's favorite candidate for a new reserve currency [I disagree. I believe it will happen faster than most people expect]. Four or five decades would be needed for the renminbi to achieve that status, according to a 2005 paper written by professor Barry Eichengreen, a famous economic historian on international monetary and financial affairs at the University of California at Berkeley [Hahaha, HILARIOUS. Does anyone believe the dollar is going to last that long?]. That is, China will have to solve some very serious problems before its currency becomes attractive for other countries' foreign exchange reserves. [Actually, it doesn’t. The US is solving these problems for China.]

Its financial markets are not very liquid or transparent at the present [US credit markets are even less liquid and transparent right now, and, as US credit market continues to worsen, Chinese credit markets look increasingly attractive by comparison]. Indeed, most of the institutional infrastructure needed for Shanghai to become a true international financial center will take decades to construct. Exchange rate regimes and capital controls are also tough problems that China still has to solve.

Furthermore, the security of property rights should not be uncertain, and making investors feel secure will ultimately require a transition to democracy [Yes, because democracy has done wonders for protecting the wealth of investors here in the states (sarcasm)], the creation of credible political checks and balances [These checks in balances really worked in the US! Just look at the financial system], and the development of a creditor class with political sway, according to professor Barry Eichengreen.

[Sorry if I seem a little anti-democratic, but US-style democracy has a few issues that need addressing. These problems include:

A) A congress that has been incapable of dealing with long term problems (projected social security shortfalls, trade deficit, global warming, growing global water crisis, etc…). Congress’s answer to all big problems has been short term fixes.
B) The dominance of corporate interest and lobbyist in Washington.
C) A nation media which has become a bad joke, as reflected by the prominence of shows like the Daily Show and the Colbert Report. A media dominated by sound bytes, human interest stories, and celebrity scandals fails in its role to educate the public about important issues.
D) Having the qualities needed to get elected (charisma) is different from having the qualities needed to govern effectively (competence). The Bush administration demonstrates this point sharply.

Since newly elected politicians rarely have a deep understanding of the economy, international trade, or the financial system, they end up relying on the advice of lobbyists, and these lobbyists have the short interests of their clients at heart, not the long term prosperity of the US. For example, bank lobbyists have been pushing for less regulation for years, and politicians (who received big campaign donation from financial institutions) listened to them. Look where that has gotten us today.

I am not saying democracy is bad. I just think it needs some serious fixing.

I will have to do entry on this subject at some point in the future.
]

For the time being

In November 2008, a G20 emergency summit meeting was held in Washington D.C. to discuss reform measures and to stabilize the global monetary and financial system. Those 20 countries accounted for about 90 percent of the overall global economy and they agreed to strengthen international cooperation.

At the summit, Japanese Prime Minister Taro Aso and Chinese President Hu Jintao, in a bilateral meeting, agreed to support the dollar-centered currency system despite growing concerns about the troubled global financial system. So this is likely to be the global financial structure China will support for the time being. [This will not last]

The background for this agreement is as follows. China expands only at 6.8 percent in the fourth quarter of 2008 on a year-over-year basis. A dramatic slowdown of the Chinese economy clearly indicates that it is not located in a safe zone from the current global economic turmoil. More importantly, due to the sluggish demand in the United States and elsewhere, its exporting industries were hurt badly.

To have a quick and solid recovery from this unprecedented global economic crisis, the priority should be placed on building well-designed international cooperation. To be realistic, no other currency but the dollar can be the candidate as the key international currency under the current circumstances. [This is untrue. Gold has been the world’s reserve currency before and there is nothing preventing it from happening again.]

In the near future, huge fiscal stimulus packages should be made in the United States to cure the economic crisis, but foreign economies should help finance immense U.S. fiscal debts resulting from the fiscal stimulus packages to maintain the current dollar-centered currency system.

Currently, due to the low oil prices, oil-exporting countries do not have the capability to finance U.S. fiscal debts [Right these nations are selling dollars]. Japan should be counted out, as their economy is in trouble[Wrong]. So China appears to be left to take sole responsibility. [and when China begins to experience hyperinflation, there will be no one left to buy US debt]

Of course, a quick recovery of the U.S. economy would be essential in China's economic restoration [Wrong. China’s economic restoration will depend on boosting domestic demand]. Therefore, China will not pursue a more radical reorganization of the international currency system.

Additionally, any quick and drastic measures to make the renminbi an international currency could lead to an irrecoverable disaster. A shift to a yuan-based global economy could be dangerous, considering China's huge exposure to the dollar-denominated assets. [China is going to experience devasting losses on its dollar holdings, no matter which path it takes.]

As President Hu Jintao said at the G20 meeting last year, improving the international currency system and steadily promoting the diversity of the international monetary system would be China's best choice for the time being.

My reaction: My comments are in the article above.