Could Mao take a bite out of the “Greenback” ?

That is what economists are and will be asking as the Chinese Yuan builds momentum toward becoming internationalized, and a rival to the USD.

Chinese President Hu Jintao may have heightened those expectations with comments made in a written interview with the Washington Post and Wall Street Journal published last month on his visit to Washington, D.C.

“The current international currency system is the product of the past,” Hu said before describing the USD’s role as the World’s chief currency in terms of trade and finance.

Hu’s comments underscore concern in Beijing that as long as the USD maintains its primacy, China will be beholden to a US monetary policy that benefits the US first and foremost.

Near the front of that fears is the US Federal Reserve’s 2nd round of stimulus, the US$600B + QE-2, some of which is migrating to China, and other emerging markets, thus increasing inflationary pressure.

Another reason for the uneasiness is China’s moves to spread its investment risk. About 66% of its US$2.8T in foreign reserves is estimated to be in USDs, leaving China vulnerable to a weakened “Greenback”.

Critics say that China would have less to complain about if it lifted its strict controls on its currency. The Yuan’s exchange rate is said to be deeply undervalued to protect the competitiveness of the Nation’s exports. To do that, China does not allow the Yuan to be converted Internationally yet.

Expectations are that is changing now, as China needs a currency befitting a country with Globally competitive banks and corporations.

It may also be easier, and maybe cheaper to pay for all its imports with its own currency instead of relying on the US Dollar, and it now allows some international transactions to be settled in yuan, also known as the Renmenbi (RMB).

The optimism is running high that the tender will become fully convertible sooner rather than later is due to the success of offshore Yuan trading.

Last July, the Yuan made its debut on foreign exchange markets in Hong Kong, and since, daily trading has risen to about US$600M a day.

The popularity of the offshore currency market in Hong Kong has given rise to the Yuan dominated “Dim Sum Bonds” we have been hearing about this past week.

The World Bank in early January sold Y500M (US$76M) of the DS-Bonds, last year, McDonald’s Corp.(NYSE:MCD) issued Y200M (US$30M) in DS-Bonds, and heavy machinery maker Caterpillar Inc (NYSE:CAT). sold Y1B (US$152M). The Yuan is on he rise. Stay tuned…Paul A. Ebeling, Jnr. www.livetradingnews.com

Though minuscule in comparison with $4 trillion traded globally in currency each day, analysts say interest has grown especially fast and reflects soaring demand to invest in the world’s second-largest economy.

The offshore trading has little sway over the exchange rate, but experts say it lays the groundwork for investors and institutions to eventually embrace the yuan as a major currency for trade and investment.

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Posted by Shayne Heffernan on Feb 6th, 2011and filed underBRIC.You can follow any responses to this entry through theRSS 2.0You can leave a response by filling following comment form or trackback to this entry from your site