EconoChina

A blog on Chinese economy & society

The real threat to the dollar

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Much have been made about China’s call to use SDR to replace the dollar as the global reserve currency and scare-mongering abound about it’s dumping Treasuries as a “nuclear option”.

Well, real threat seldom comes with such thunder and lightning. It tends to be small and innocent enough, like allowing foreign central banks and overseas lenders to start investing in China’s bond market. From the FT:

The People’s Bank of China, the central bank, said on Tuesday it had launched a pilot project to allow greater foreign access to its largely closed domestic interbank bond market in order to “encourage cross-border Rmb [renminbi] trade settlement” and “broaden investment channels for Rmb to flow back [to China]”.

Getting more countries and companies to use the currency in cross-border trade transactions would reduce China’s exposure to the US dollar, which is used for most Chinese trade.

“This is an integral part of pushing the internationalisation of the Rmb,” said Wang Tao, chief China economist at UBS. “In order to encourage foreign institutions to get involved in Rmb settlement, you need to give them somewhere to invest.”

Most commentators expect that it’ll take 7 years for the RMB to be freely convertible, with the optimists are arguing for 5 years. Either way, it will come, and the dollar’s reign will end.

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Written by Cindy Luk

August 18, 2010 at 2:52 am

Posted in China

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