China up, U.S. down, that's all you need to know

Will the renminbi be the world's new reserve currency? Don Pittis says that is not as crazy as you might think.
Don Pittis has reported on business for Radio Hong Kong, the BBC and the CBC.

As much as ever this week, it seemed as if China and the U.S. were on escalators going in opposite directions.

In the U.S., the government cut its own growth estimates. A top debt-rating agency threatened the country with loss of its triple-A status. And the country's central banker hinted he was ready to print money.

The mood from China seemed completely different.

The world's biggest bank and the world's biggest oil company, both Chinese, saw profits rise nearly 30 per cent. A Chinese company announced it was listing on the Taiwanese stock exchange. And the country was still basking in the news that, by some measures, its economy is the world's second largest, beating out Japan.

Now, on top of this, there is word that China is preparing its money, the renminbi (also known as the yuan), to be the world's new reserve currency, displacing, or at least competing with, the U.S. dollar.

According to David Pilling in the Financial Times of London, this is a move that has been brewing for months. But his column in Thursday's paper was the first I'd even heard of it.

Even two years ago, before what Federal Reserve Chairman Ben Bernanke would like to characterize as The Panic of 2008, the idea of the Chinese economy ruling the world seemed far-fetched, at least according to Bernanke.

Yes, the euro was seen as a potential competitor for the greenback, but the renminbi? Laughable.

The big stumble

But now, as Bernanke's Panic of 2008 stretches toward Terrified about 2011, suddenly it is hard not to take the idea seriously.

A sign on a currency trader in Hong Kong. (Associated Press)

On Friday, for example, American traders took comfort in the fact that U.S. GDP growth for the second quarter was revised down from 2.4 per cent to only 1.6 per cent, instead of the expected 1.2.

Cold comfort. That means the last three quarters follow a bleak trajectory: five per cent, then 3.7 then 1.6. Get your child to write the next figure in the series.

Meanwhile, Standard & Poor's rating service was telling the U.S. it might have to reconsider America's top debt rating unless it gets its budget in order. You'll remember that's what started all that trouble in Greece.

Still, Bernanke, the country's central banker, was bracingly optimistic.

You can hardly expect him to lead the charge toward gloom. But Bernanke did allow that he "is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly."

He doesn't say it directly, but that sounds like he is going to print money to try to jumpstart the American economy. And that is not good for a reserve currency, the so-called anchor currency that governments everywhere elect to have stockpiled.

Good luck

So what are the true prospects for China to provide the currency that we use to trade between nations?

It seems a bit bizarre considering that the renminbi, or the yuan, if you prefer, doesn't even trade freely on world markets. It is still strictly controlled by a government agency that keeps it pegged to a basket of other world currencies.

But already that may be changing. As you can see in the Pilling article, the U.S. fast food chain McDonald's has issued bonds in renminbi. (The joke in the trade is that RMB, the letter symbol for the security stands for Ronald McDonald Bonds.)

Other companies, mostly banks, are doing the same thing.

Today, the Chinese government is encouraging companies that do regular business in China to denominate some of their deals in renminbi.

According to Sharon Wilks at HSBC Canada, you can't yet get renminbi personal accounts here, but you can in Hong Kong.

The day after Pilling's article, the paper he works for editorialized on the subject. It expressed a certain doubt that China can pull it off but, magnanimously, encouraged it to try.

Centre stage

In many ways, China is today playing the role the U.S. did in the middle of the last century. The dollar took centre stage, particularly after the Second World War, as the British pound was becoming mired in crisis.

Back then the U.S. was slowly but surely outgrowing the British Empire, which was in terminal decline.

Even the frontier analogy would not be out of place in today's context: One of America's great strengths was that it grew into the West, using the most modern European technology to build an internal economy that could out-perform its European rivals.

China is now doing exactly that, expanding into its own populated frontier with brand new infrastructure and technology.

Perhaps, very soon, it will do what the U.S. did and begin consuming so much of its own product that exports will just be gravy.

As it becomes economically more secure, there are indications that China is moving into the next stage of being the world's premier power.

Its fear of openness may be fading. An example being the stock listing in Taiwan.

Perhaps it is in the process of becoming more humane. The People's Congress discussion on cutting back on the use of the death penalty from outrageous to merely excessive might be seen as a good sign in some quarters.

But we should probably remember that the smart people at China's central bank aren't just promoting the renminbi to be cool or modern.

Being able to borrow money in your own currency, while having trillions of it sitting in the world's bank accounts, is very profitable indeed. It is something that has helped to power the American 20th century miracle.

If China is able to follow the same route and not stumble on the way, your children will be singing about the Chinese currency the way your parents sang about the Yankee Dollah'

And there's a project to get you ahead of the game. Quick, what rhymes with renminbi?