Wednesday, March 25, 2009

China pushes for new currency

The Chinese are seen and heard talking and writing about a new world reserve currency to be used as store of value and money for commodity exchange. They hold $1T of USD. It is a bit of a war declaration. They didn't like QE it seems. It hurt them on 1/ the holdings 2/ the exchange rate. It also marks a new assertiveness in economic affair. How practical a new currency is, I have no idea. Europe prepared for it and it can be done. This is an interesting development.

7 comments:

oogifu said...

Marc,

May I ask for the source article please?

Marcf said...

it is all over the news.

Pick one

http://www.dw-world.de/dw/article/0,,4126017,00.html

Obama rejected the offer. And so has the EU it seems.

Anonymous said...

it's a silly but not useless proposition. I think it's purpose is to let the world, and Washington especially, know just how deep their displeasure goes.

the dollar was never "declared" the currency of world trade - it just "became" it through many years of rational global trading.

Marcf said...

anon,

yes this is how I understand it, the dollar "is" whether they like it or not. In the short terms, there is nothing they can do but stop selling stuff for dollars and buying treasuries with those dollars. The collapse of international trade would be the outcome. That would not be good.

Rob Lanphier said...

China is painted in a corner by their artificial devaluation of the yuan. Now that the U.S. is deliberately devaluing the dollar, it's pretty much impossible to push the yuan below that. They now seem to be grasping for some other currency to be artificially lower than.

Marcf said...

Yes, there was a bit of kettle calling the pot black with this whining about the dollar devaluation. The big difference however is that they are net creditors and it hurts them more than it hurts us. Currency manipulation is the standard they should not act so surprised when the US takes a bite out of its own debt. And this is the very reason why the US would not want a different currency. Beggar thy neighbor, which described great depression era protectionist legislation is alive and kicking on both sides of the regime divide, China and the US. QE is beggar thy neighbor. So they are unhappy, so there it is.

A way to hedge this is of course to have many reserve currencies. This is a stated goal of the euro, to become a reserve currency, apparently alongside the dollar as officials have already responded non-interested to a new currency proposal.

Something tells me that such a currency will come from the financial world where already there are synthetics that replicate baskets of currencies. Can trade grow off a synthetic?

That reminds me that in the contract with China, I am quoted in local currency with a clause that we would 'share' the pain of currency exchange. If $ goes up, I pay half of the up, if $ goes down, I have to put up half the increase. This was considered "fair" by my chinese counter-party.

I believe but would have to check that this payout is equivalent to a contract quoted in a synthetic currency, called the blouga which is defined as

1 blouga = 1 dollar + 1 dollar x spot.RMB.

So you create a currency out of equal weights of dollar and RMB.

Share the wealth, share the pain.

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