Monday, January 3, 2011

Internationalizing China’s Currency

China is pursuing a strategy of gradually internationalizing its currency, the renminbi (people’s money) denominated in yuan (dollar), jiao (ten cents), and fen (cents).   It has established bilateral use of its currency in trade with Russia, Malaysia, Hong Kong, Macao, and other Southeast Asian countries.

More recently, China has offered to buy the public debt of Greece, Portugal, and Hungary.  Once these purchases have taken place, China will make an offer the three countries won’t be able to refuse, namely, conduct bilateral trade in renminbi and give consideration to Chinese exports over other countries’ goods and services.  If the offers are accepted by the three countries, it is possible that China will find willing sellers of public debt in Spain and Ireland, and perhaps Italy down the road. 

The step-by-step increased use of China’s currency in public debt markets and international trade will slowly reduce the status of the U.S. dollar as a reserve and transaction currency.

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