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January 17, 2011

China: It's on like Donkey Kong!

[Edit: It is rude to refer to China's president as "Jintao" since that is his given name; "Hu" is the family name. Thanks to Lou in the comments for pointing that out.]

China's President Hu Jintao announces that the USD's status as the default world reserve currency is a "product of the past". Jintao Hu also announced his intention to make the Renminbi (Yuan) a bigger player in the world currency markets.

I see this as a fairly stupid move on JintaoHu's part. The Yuan is worthless as a reserve currency because no one outside of China uses it (and China treats "domestic" Yuan differently than "international" Yuan, which is mainly an electronic bookmark and not a currency per se). And China is trying to flex their financial muscles at a time when much of their own strength is illusory.

JintaoHu's main point may be that while China currently dances to the USD tune -- they buy hundreds of billions worth of USD-denominated Treasuries, after all -- they are not happy about it and do not plan to continue with the status quo forever. China has apparently had enough of Obama's pissing and moaning about the exchange rate, Chinese currency manipulation, and the trade deficit, so they're serving notice that the USD's days as the world's reserve currency are numbered. (This is probably true, though the Yuan certainly won't be the currency to displace it.) China's long-term financial outlook is even bleaker than our own, and the markets know that full well. But China is in the midst of a sugar high, and their dreams of an ascendant Middle Kingdom (never very far below the surface) are bubbling up once again.

Add to that the fact that China is still run by a bunch of authoritarian Communists, and you see why investors might be a little suspicious of China's motives.

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posted by Monty at 10:02 AM

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