China’s Global Currency
I posted last week about the growing unease of the Chinese Central Bank toward its US investments. Now China (along with Russia) has manifested its unease with a call for a new global currency, led by the International Monetary Fund. As scary as this notion is, I wanted to highlight the growing unease with the US dollar. While it appears unlikely that China is willing to take an investment hit in order the skewer the US, it is clearly setting up for a dramatic shift away from supporting the issuance of dollar debt.
How China Sees the World (Economist.com)
China understands that the only way for the US to service its debt is through monetization. It’s unlikely that they ever imagined a US recession would lead to this type of monetary expansion:
As the US dollar currency in circulation approaches $1 trillion, China is finally trying to find a new safe haven for cash.
Is it likely that we will see another Bretton Woods soon? I don’t think as it stands now. But maybe, just maybe, China is setting the framework for a future day when it dumps its treasuries and punishes the US. This certainly would be painful for Beijing, but what is this investment actually worth anyway? It may be the perfect catalyst for a Shanghai version of Bretton Woods in 2010. Could a new currency order with China leading the way be worth its investment loss?
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China can buy less US debt but it is doubtful they will be net sellers, more or less they just may not buy as much.
John Mauldin notes that as long the U.S. in net importer of Chinese good China will likely still gobble up our debt. If they don’t the yuan will appreciate making their goods cheaper for the US to buy and thus hurt their economy which is so depend on selling to the U.S.
I do give credence to Teacherman’s concerns and here is why. As Mauldin notes as long as we buy from China…
Well I could for see a situation (See The Consumer is Tapped! ) in which the U.S. consumer retrenches (consumer spending falls to 60% of GDP vs. the current 69% of GDP) and we thus import a significantly less amount of Chinese goods. Then the Chinese have less dollars to recycle and treasury refunding become a much more ominous task.