Word: dollarization
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Dates: during 2000-2009
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China's swipes at the U.S. dollar have been spilling out of Beijing with almost mundane regularity. Every time there is an international economic summit, it seems that some Chinese mandarin reiterates the now familiar complaint that the greenback needs to be replaced as the world's de facto reserve currency. China usually suggests some "supranational" currency as a dollar substitute, to protect it against instability that could arise from any one country's errant economic policies. A favorite suggestion is the use of Special Drawing Rights (SDRs), the unit of account at the International Monetary Fund...
...Beijing's leaders may also see China's own currency, the yuan (also known as the renminbi), as a possible alternative to the dollar. There are indications that China intends to make the yuan a greater factor in international trade and investment, a development that, if successful, would have major implications for the global financial system. HSBC economist Qu Hongbin believes that the yuan could become one of the top three currencies in the world by 2012, with some $2 trillion in trade transacted in the Chinese currency each year. "The internationalization of the renminbi has become a leading item...
...currency is used around the world is usually a function of how important its home country is to the global economy. During the 19th century, when the British Empire reigned supreme, the pound was the top international currency. Since World War II, that role has been played by the dollar, with the U.S. having by far the world's biggest economy. Now that China is rapidly charging up the list - it currently ranks third and could overtake Japan as No. 2 as soon as next year - there is good reason to believe the yuan could dash into the big league...
...found in world currency markets. The reason is Chinese policy. Government restrictions prevent the yuan from trading freely around the world or being fully convertible to other currencies in all financial transactions. The yuan's value is pegged to a basket of currencies likely dominated by the U.S. dollar and is permitted to change each day only within a narrow band. Under such limitations, China's dreams for the yuan cannot progress very far. (Read "Outlook for U.S. Dollar Darkens...
...from the same concerns as its calls for a new reserve currency. Greater use of the yuan in trade would improve the competitiveness of Chinese exporters by reducing transaction costs and currency risks. By internationalizing the yuan, says HSBC's Qu, China can also begin extricating itself from the "dollar trap," in which the country, through its trade, amasses giant surpluses of dollars, which forces it to invest in dollar assets. This is why China, which holds $805 billion in U.S. Treasury securities, is the U.S.'s largest creditor. But this dollar hoard makes China's national wealth vulnerable...