economic cycle

In the 18th century Britain was the largest economy of the western world, London was the centre of international trade and finance, the currency was convertible and so sterling became the world’s first reserve currency. The US dollar dethroned British sterling to become the world’s reserve currency in the 1920’s and by the late 19th century, the US had become the world’s largest economy.

In less than a decade we could see the US no longer being the world’s largest economy. By then, China and India will have overtaken the US, Europe and Japan, on purchasing power parity.  Iraq’s threat to trade oil in the Euro was eradicated by invasion. Recent attacks on the value of the Euro are not coincidence, with the EU reeling from a lack of fiscal prudence its threat as a reserve currency has disappeared. According to a  recent news item:

“Gold, copper and other commodities could be paid for in yuan within a decade or two, bankers and traders said on Wednesday, provided China pursues its policy of gradually freeing up trade in the currency. Already the world’s biggest consumer of commodities such as industrial metals and oil, China’s economy is growing more than three times faster than most developed countries. Chinese customers and end-consumers such as refiners and fabricators now typically pay for such imports with dollars, but bankers at a Financial Times commodities conference in Switzerland think that will change, possibly quite rapidly. They expect the yuan, also known as the renminbi, to be used increasingly to settle contracts into China and eventually as the basis for commodities trading, at least in Asia. Edward George, a specialist in soft commodities at Ecobank, which specialises in African investments, said the yuan would continue to be held back as a currency of choice until it could move freely on international markets. The yuan is not convertible for purely financial purposes unrelated to trade and investment. ‘But if the Chinese government wants to do a cobalt deal in return for services, they will use renminbi,’ he said.

‘Trade in renminbi has been expanding faster than anyone anticipated,’ said Harris Antoniou, the global head for energy, commodities and transportation at Dutch bank ABN AMRO . “Long term, in say 10-20 years, it’s going to have a real presence.’ HSBC’s Lambert agreed that China’s role as the world’s biggest commodities importer meant the yuan would be used increasingly as a settlement currency. The Financial Times reported last week that the London Metal Exchange was considering offering traders the chance to settle its contracts in renminbi. ‘Definitely you will see the renminbi become more and more important for all types of trade,’ Lambert said. ‘If you compare the situation now with two years ago, there has been huge growth and development. It is growing far faster than anyone believed. ‘ ” [Lausanne, Switzerland (Reuters) – (Additional reporting by Alan Wheatley; Editing by Ruth Pitchford]

The Chinese hold almost a thousand billion dollars of US Treasury securities.  They are the largest creditor nation in the world while the US is the largest debtor nation. Just as British indebtedness to the USA toppled its powerbase so it appears an economic cycle has all but turned full circle.

 

However, to attain the position as the world’s reserve currency of choice, China has to make the Yuan fully convertible, remove restrictions on foreign capital entering and leaving the country and accelerate financial reforms. It will be interesting to see if the new regime in Beijing will continue its predecessor’s economic policies and is not derailed from economic prosperity by outside malevolent influences.

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