Source: National Multi
Still, China has succeeded in keeping its currency competitive, with the yuan rising by only 2 per cent since the beginning of this year, compared to almost 10 per cent for the Thai baht. The world has never witnessed a competitive devaluation of this nature and scale.
Since April 2009, according to DBS Global Research (October 7, 2010), China's foreign exchange reserves have risen by US$535 billion. That is more than half of the total increase - $962 billion - of the foreign reserves of Asia. Some US$2 billion a day in liquidity has been flowing into Asia ever since. Between February 2009 and August 2010, the US Federal Reserve injected $1.5 trillion into the economy by purchasing US Treasuries and mortgage-linked securities. It is no coincidence that the central banks of Asia have found a sharp rise in their foreign reserves as a result of the US quantitative easing programme.
Be prepared for the next round of the financial tsunami. The US Federal Reserve could be pumping in liquidity to the tune of $3 trillion to $3.5 trillion to prop up the US financial system. Japan has already cut its near-zero per cent interest rate and will be doing everything to stem the rise of the yen to boost its exports. Europe also prefers a weak euro to cure its economic malaise. At the same time, all the emerging-market economies are trying keep their currencies weak to sell more exports in overseas markets. But they are finding it difficult to prevent their currencies from rising due to the huge inflow of capital from the developed economies.
China has warned against the US's quantitative easing, which debases the value of the dollar. Since Beijing holds about 60-70 per cent of all the outstanding US Treasuries, China has every reason to fret at the falling dollar value. It is now only buying short-term US Treasuries. Beijing holds the largest amount of foreign reserves of any central bank at more than US$2.4 trillion.
With the US's plan to mount a second round of quantitative easing to the tune of $3 trillion, China understands very well that the US banks are already in deep water. Beijing is now revving up for its role as a global financial superpower.
It is plain to see that China has been trying to play a more dominant role in global institutions such as the International Monetary Fund and the World Bank. It is calling for a change in the voting quota system so that China and other emerging-market economies can have a bigger voice in the IMF. Beijing also wants the basket of currencies of the IMF, which is dominated by the dollar, the yen, the euro and the pound, to give more room to the yuan. At the same time, China is now liberalising its financial markets by making it more convenient for institutions to conduct yuan settlements. It is only a matter of time before Beijing allows full convertibility of the yuan.
When China moves to adopt full convertibility, it will print the yuan in exactly the same fashion that the US prints the dollar. It is ready to dump its US Treasuries any time and kiss the US goodbye. By that time, the yuan will emerge as a global currency. Can the yuan reach to the stars? We shall see.
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