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I.M.F. Makes China’s Renminbi One of World’s Select Currencies
- adventured 11y agoA big deal has been made about this, however it was inevitable and the only logical thing to do. With the substantial Yen debasement, Japan's economy is now less than half the size of China's. That will fall to 1/4th in the next ten years. Even if China were to need to devalue their currency substantially over the coming years, as is being regularly argued now, that would pale in comparison to what Japan will do to its currency in the next decade or two in order to manage their debt disaster. There's no sound argument for keeping the Yuan out of that IMF basket. The next decade economically will be about the US and China, with Japan and Russia fading further into the background, and the Eurozone continuing to struggle with Europe showing zero net growth (the UK will be a bright spot in Europe thanks to not being part of the Euro (see: the depression it has put Finland in)).
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- vegabook 11y agoYou are not saying anything original here that is not the complete median view on the Street. Eurozone 0%: check. UK bright spot: check. Japan a debt disaster: check. Russia suffering: check. China/US the future: check. There is nothing here that if followed, will allow anybody to outperform because this is complete consensus, it's what's priced in almost exactly. Yet the real alpha-generation skill is to challenge the received wisdom which here, is light years from happening. How about the view that the a 9% yield in Russia is actually hugely more interesting than a 2% yield in dollars. What about the idea that 40$ oil is cheap as chips and the bargain of a generation? Maybe China's debt situation is, if we dig a bit deeper than the surface, much worse than Japan's, short term? Perhaps the UK is a financial bubble far too long of Arab money and that the Eurozone's current travails represent the small potential for light at the end of the tunnel on the view of renewal? Not saying these are true, just that they might be worth considering. Still, thank you for paraphrasing in one short paragraph exactly what I hear in my inbox in PDF form 20x per hour from the analyst community.
- adventured 11y agoSure, but you won't catch me disagreeing that the upcoming $30x oil price isn't a huge bargain. I think it is, and I think numerous oil companies are going to be tremendous investments at that point. Lots of commodity sectors are producing huge bargains already, and are likely to get cheaper yet. Anyone patient enough to hold long-term and suffer through the next few years, will be rewarded. I don't think Russia is interesting. They're incapable of doing anything economically outside of commodities, and so long as the dollar is strong, Russia will be a mess. Putin has wasted his time in power on consolidating power, rather than diversifying the economy. They're a very low innovation, stagnate economy. That has resulted in the facade coming off, it's clear now that Putin has no clothes and can never cultivate a truly prosperous economy (their GDP per capita is now below Romania and Poland). It's the typical command economy outcome. Russian culture seems to spend all of its time being angry at the outside world for their self-inflicted wounds, creating an us vs them mentality, and it leads them to the same place every time: isolation. They have an intense victim mentality, and extremely low national self-esteem (which is where the projecting comes from and why Putin has to pretend to be a strong-man when he's the exact opposite). You watch these documentaries on their culture, and it's almost unbelievable how backwards they are: https://www.youtube.com/watch?v=iZcUsdARY6o https://www.youtube.com/watch?v=iZcUsdARY6o https://www.youtube.com/watch?v=pv6ROkgsiNs https://www.youtube.com/watch?v=pv6ROkgsiNs https://www.youtube.com/watch?v=IaoYKoImjys https://www.youtube.com/watch?v=IaoYKoImjys I agree that China is in very, very serious trouble when it comes to debt. They may be the most indebted nation per dollar of GDP at this point, including the huge sums of shadow debt stalking around their economy. However, I think it's more likely they'll stagnate for the next 20 years, Japan style, rather than suffer any near term sharp event. They've practically copied the mistakes Japan made perfectly. China's debt will eat most of their growth potential, until they either grow beyond it enough, or start paying it down.
- vxxzy 11y agoWhat implications could this have for oil? Isn't oil bought and sold using US Dollars? I've always heard the World "Does Business" in US Dollars. Is this the beginning of the end for the Dollar as an international norm?
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- adventured 11y agoModest implications. No more than the Euro or Yen at their peaks did. No, it's not even remotely close to the end of the dollar as the international norm. The dollar is stronger today than it has been in 20 years, and it's gaining strength as the Eurozone and Japan are a mess. The most likely outcome to this, is that the Yen loses the position it has held on the global stage for the prior 30+ years or so. Japan is the nation that will suffer the most as China's currency rises. Right now Japan is depending on the Yen as their only remaining prop to use against their debt; the weaker the Yen's global position, the less they can spread that debt monetization cost around. China's currency will become the dominant Asian currency; the Euro will remain the dominant European currency (unless something unexpected - and worse than it has already absorbed - happens to rip the union apart (that could be Finland bailing, triggering other nations to leave as well)); the dollar will remain the global reserve currency (there needs to be one, and the West is far more comfortable with that scenario than becoming more reliant on China, as are Japan and numerous China competitors in Asia).
- the-dude 11y ago> The dollar is stronger today than it has been in 20 > years As far as I remember the US Dollar was about 1.25 the value of the Euro at it's peak in 1999/2000. We traded in dollars at the time.
- adventured 11y agoThe Yen was a credible currency in 1995, and it's now in much worse shape (both today and its outlook). The Euro was widely expected to pose a challenge to the dollar globally, which has not happened at all. The dollar is as strong as it is even with 0% interest rates. Imagine if rates were even half the levels they were 20 years ago. I'd definitely make the argument the dollar is stronger today than it has been since the late 1990s when the US economy was riding very high. In the next few years, most likely the dollar will gain more strength (the US budget is currently under control, growth is ok, and the employment picture continues to strengthen spurring tax growth), the Euro will be debased with more QE in mostly futile attempts to spur Eurozone growth, and the Yen will lose a lot more value. The Yuan is also likely to face significant devaluation as China struggles to grow in real terms, but it will at least see greater global share. Things are looking great for the dollar at least for the next ten years.
- acd 11y agoThis is how the worlds reserve currencies has looked historically. My personal guess is that the Yuan will be the next bar in the graph. http://azizonomics.com/2012/01/04/a-history-of-reserve-currencies-in-one-graph/ http://azizonomics.com/2012/01/04/a-history-of-reserve-curre...
- chimeracoder 11y agoI'm more than a bit skeptical of anything pre-1750 in that graph, because the "world's" reserve currency means something very different in today's global economy than what that graph appears to be using to define them. Those might pass for European reserve currencies in a pre-Industrial Era, but they certainly do not reflect the world economy of the time period by any means. In addition to all of that, the USD is the only currency on that graph that was not on a gold standard at the time. That's a huge difference.
- mikeash 11y agoWouldn't the gold standard render the entire notion of a "reserve currency" meaningless, too? If you're holding a gold-backed currency then you're effectively just holding gold. Holding a currency as a "reserve currency" probably meant actually holding a bunch of gold in a vault. It hardly matters whose face was on it.
- chimeracoder 11y ago> Wouldn't the gold standard render the entire notion of a "reserve currency" meaningless, too? Yeah, it does. The more I think about it, the less sense that graph makes. It's not entirely meaningless because there are still benefits to being the reserve currency in a gold-backed world (e.g. cheaper cross-border transactions from not having to do any forex). But the biggest impact of being the reserve currency today is on monetary policy, which only makes sense in the context of fiat money.
- justincormack 11y agoNo, there was still credit creation under the gold standard, and debt markets and so on.
- chollida1 11y agoChina had to make some concessions to get the yuan into the SDR basket. Most notably they have committed to issue 3 month T-Bills every week and to allow foreign central banks to access their currency and bond markets. Note also that this doesn't take place until October of 2016 so there should be no immediate impact on the markets. Also note the SDR has a very minor share of the global currency reserves so this is more symbolic at the moment.
- tomp 11y ago> Also note the SDR has a very minor share of the global currency reserves so this is more symbolic at the moment. More (10.92%) than GBP (8.09%) and JPY (8.33%) actually.
- chollida1 11y agoWhere do you see that SDR is 10.92% of all global currency reserves. I can't find anything that shows SDR being anywhere close to that amount. See here: https://en.wikipedia.org/wiki/Special_drawing_rights#Allocations https://en.wikipedia.org/wiki/Special_drawing_rights#Allocat...
- tomp 11y agoAha, I get it. I misread your statement. I thought you were saying that CNY is a small share of SDR, not that SDR is a small share of all global reservers. My apologies.
- socrates1998 11y agoYeah, I didn't know the details, but China for sure had to make some concessions to get in. It will be interesting to see how much they allow their currency to float and how much more (if any) they will allow their citizens to expatriate the yuan.
- AC__ 11y agoWhile you present a compelling argument, I must respectfully disagree. I may catch some flack for saying it, and many people refuse to believe it, but the U.S. is insolvent. The value of the U.S. dollar is artificially propped-up. How long do you truly believe the Russias and Chinas of the world are going to keep using greenbacks? They will feign WWIII, Israel will expand to encompass 'Greater Israel' and U.N. will formally install global government, and USD will cease to be de-facto global currency.
- AC__ 11y agoDownvote, but in a year or two remember atodaso lol https://www.pinterest.com/pin/264164334368722823/ https://www.pinterest.com/pin/264164334368722823/
- adventured 11y agoInsolvent you say? The US owns 45% of all global wealth (per Allianz's global wealth studies, it was ~50% pre great recession, fell to about ~39% in 2010 as the US suffered heavy asset declines, and has rebounded back to around ~45% with the recovery in the US economy, that gap is mostly the arrival of China's wealth). The US is massively solvent in fact. Furthering this point, the US is now growing as fast as China in real terms (given pretty much every credible study indicates China is at least lying about half of their growth); the US is also gaining substantially against most of Europe, as its economy continues to grow faster than Europe even with a stronger dollar. South America and most emerging markets have been thrown into near-depression status, due to the stronger dollar. The US economy is likely to enjoy a very nice 10 or 20 year run in fact. Russia's economy is now - as of the latest 2015 numbers - 1/12th the size of the US economy. It no longer matters as a global economic power (it still matters as a global commodity player). Its economy is smaller than Canada's now. China will continue to use greenbacks because they will never have any other choice, the same as they'll continue using Euros. The US is back to being China's biggest trade customer (with the dollar having gained so much value): that trade is mostly done in dollars and that will continue.
- mooreds 11y agoNote that actually, being a reserve currency isn't all that great, as you cede some control over your local economy. See http://blog.mpettis.com/2014/10/are-we-starting-to-see-why-its-really-the-exorbitant-burden/ http://blog.mpettis.com/2014/10/are-we-starting-to-see-why-i... for more.
- mark_l_watson 11y agoRespectfully, I must dissagree. My country (USA) has benefitted hugely by being the reserve currency: effectively being able to generate money by fiat with lower chance of this causing inflation because other countries buy dollars and hold them in reserve to buy oil, etc. I expect the economy in the USA will take a small gradual hit over the next decade as we lose (mostly exclusive) reserve currency status.
- mooreds 11y agoMark, that's a good point. However, I don't know how much of the world's dollars are used to buy goods that are priced in dollars, but I suspect the holdings of the developing countries to defend their currencies dwarf the amount used to buy such goods. From http://usgovinfo.about.com/od/moneymatters/ss/How-Much-US-Debt-Does-China-Own.htm http://usgovinfo.about.com/od/moneymatters/ss/How-Much-US-De... foreign governments own $4.5T of the US debt.
- jacobolus 11y ago
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- zkhalique 11y agoI always said the dollar will lose its position as an outlier eventually. Reversion to the mean.
- beatpanda 11y agoDoes this have an affect on the ability of wealthy Chinese people to move their money out of China?
- Animats 11y agoThat's a very big question. China has exchange controls, but only for residents of China. If you have access to Hong Kong, which the rest of the world does, you can exchange yuan for other currencies at market rates. China's exchange controls are leaking at the rate of about $500bn a year. It's worrisome that China's rich people want to get their money out of China. China is growing faster than the dollar or euro zones. Yet rich people in China are overpaying for US and UK real estate. What do they think is going to go wrong in China?
- caskance 11y agoThey think they will be charged with corruption and they'd like to own homes and assets in other countries that won't be seized when that happens.
- thaumasiotes 11y agoA few years ago there was that entrepreneur who was executed (!) for seeking funding improperly. I'm not sure guarding against seizure in the case of corruption charges is what people are thinking of; corruption charges might be unrecoverable.
- caskance 11y agoIf he were living in Vancouver, the Chinese government would likely have not been able to execute him. And not everyone gets capital punishment.
- mark_l_watson 11y agoBefore today, I think the US dollar was about 60% of the SDR bucket of currencies. For years I have read about probable problems if the US dollar was no longer the reserve currency, but it seems from what I have been reading that there is some sort of negotiated slow migration from the US dollar to using SDRs as the reserve currency. I like slow and steady change, even is it means that eventually my country (USA) will lose a lot of economic advantage.
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- JamesBarney 11y agoWhat problems have you read about the U.S. facing if it stopped being a reserve currency? My understanding is that we would lose seigniorage, and maybe see a small increase in borrowing costs. But the upside is value of the dollar would drop, making U.S. exports more competitive.
- Gustomaximus 11y agoIMO US federal debt will likely become an increasingly significant issue. Interest costs of losing reserve status may be small or large. It really depends on market confidence. And given historically low rates today, significant cost increases are not that unlikely if US loses influence on global of monetary policy. From this large cost increases could put the currency in a death spiral given ~450 billion annual repayment costs already at todays low rates. Please note I'm not saying this will happen, but feel it should be a recognized risk if borrowing continues at the current trend. I believe this is an elephant in the room which is likely to cause a massive macroeconomic shock in 5-20 years. I simply cant see the current political parties making the sacrifice to address the unfettered debt growth. I too recognize most financial experts tend to disagree with this view.
- npalli 11y agoThe USD has gone from 41.9 to 41.73% in the SDR basket. So, no change in the Dollar status. The Euro has gone down the most from 37.4% to 30.93%. The importance of SDR as a reserve currency is not accurate. http://www.imf.org/external/np/exr/facts/sdr.htm http://www.imf.org/external/np/exr/facts/sdr.htm
- rrggrr 11y agoThis story masks BAD news. http://blog.mpettis.com/2015/11/chinas-rebalancing-timetable/ http://blog.mpettis.com/2015/11/chinas-rebalancing-timetable... China's debt today is over 200% of its GDP and may exceed 300% in five years. One hopes the IMF and China agreed on concessions will assist China in rebalancing its economy quickly, because as Petits' posting points out -- a disruptive end is near for the current model.
- narrator 11y agoMy comments on this previously: https://news.ycombinator.com/item?id=10601219 https://news.ycombinator.com/item?id=10601219 TL;DR China's financial system is partially privatized central planning so it follow different patterns than the Western financial system.
- AReallyGoodName 11y agoWhere are the sources for any of the claimed figures in the article? It doesn't have one single link to any of the claimed figures and a quick Google shows the claimed figures to be at least an order of magnitude out.
- fspeech 11y agoInternal debt is also internal asset, which net out to zero. China is a net international creditor. Its internal debt structure may have implications for its economoic future, but is not nearly as relevant as its current account balance for foreign holders of RMB.
- rrggrr 11y agoInternal debt is not an asset because the debt holders are SOE's, provincial governments and companies too big too fail. Therefore the largest share of debt is public debt, and work must be done to raise incomes throughout China so that debt can be serviced by taxes on a healthy private sector.
- beachstartup 11y ago