As China's currency becomes easier and easier to trade, and as its economy grows, it is becoming an alternative to the greenback. Here's how investors can play the trend.
by Jim Jubak
Throughout the global financial crisis -- even as the problem changed its focus (and name) from the U.S. mortgage-backed securities crisis to the eurozone debt crisis -- the United States could find solace in the strength of the dollar.
It may not have been a currency backed by the largest gold reserves or a well-run fiscal policy, but it needed only to be less bad than its global competitors. And up against a euro that threatens to come apart and a yen backed by a Tokyo government with an even bigger debt problem than Washington has, the dollar looked good enough.
For liquidity, for the depth of its markets and for its ease of transfers and payments, the dollar was relatively strong, because the competition was relatively weak. The dollar was a global currency without real competition. That's been critical to allowing U.S. Treasury prices to rally and yields to fall even after the country lost its AAA credit rating.
The dollar isn't without long-term competitive threats, however. The most obvious of those has long been the Chinese renminbi, or yuan. (China's currency is named the renminbi. The units of the renminbi are the fen, jiao and yuan. It takes 10 fen to make a jiao, and 10 jiao make a yuan. It's as if the U.S. currency was named the dollar, but its units were called the George, the Alexander and the Benjamin.) But that threat, while acknowledged as real, has always seemed very, very distant.
Well, I think it's time to at least take one "very" off the timeline. China is moving more quickly than expected to turn its currency into a true global alternative.
How far can it go?
It remains to be seen if the Beijing government can bring itself to give up the kind of control over its currency that would be necessary to turn the renminbi into a real alternative to the dollar. China's economic policies are so grounded in the government's ability to control the exchange rate, and the flow of its currency in and out of the country, that the renminbi may never gain the currency market share that China's economy and reserves could otherwise command. But the global financial crisis -- and the damage suffered by the euro, which had looked like a true alternative to the dollar before the European debt crisis -- has pushed Beijing into action faster than projected even just a year or two ago.
Any real challenge to the dollar from the renminbi isn't going to come tomorrow. But I don't think investors should take the long-term supremacy of the dollar for granted. The likelihood of slippage in the dollar's global role has implications for global stock and bond markets, for U.S. interest rates and for U.S. economic growth rates that you should at least consider in formulating any long-term investment plan.
The latest move -- announced just last week and set to take effect in the third quarter of the year -- is, to me, a bombshell that indicates just how quickly the currency game is changing for the renminbi. (It also suggests a few stocks you might want to consider for your portfolio to take advantage of the long-term currency trend.)
But first: What happened last week?
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