Monday, 23 December 2013 10:12

China’s Central Bank Nixes Future U.S. Exchange Reserves’ Advantage Featured

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In a startling announcement foretelling the coming end of U.S. Treasury bond purchases, the Chinese Central Bank declared “no more accumulation of foreign exchange reserves.” 

At the end of the third quarter 2013, China’s foreign exchange reserves were valued at approximately $3.66 trillion, the biggest chunk of which was made up of U.S. dollars. China had been accumulating dollars for years to strengthen the dollar and keep its “yuan” currency down, to give its huge export sector a competitive advantage over an import world, primarily based on the American currency. 

But with a distinct switch toward accelerated domestic growth, it’s in Beijing’s best interests to let the value of its yuan creep up, as its acquisition of oil, coal, natural gas, and agricultural products have taken top rung. Although the abandonment of U.S. Treasury debt auction participation may not be turned off precipitously, it is likely that this will diminish in the foreseeable future. 

As China’s top-heavy purchases of U.S. Treasury debt ease off, this will also have the adverse effect of making the myriad of goods and services emanating from China increasingly more expensive. This will not only affect the direct cost of Chinese goods, but also the untold number of goods emanating from American-owned factories and subsidiaries transferred to the Chinese mainland. This is due to the major cost advantage this has provided to some of America’s largest corporations, allowing “made in U.S.A.” to be squeezed out. 

The scope of this advantage has also been diminished by China’s unprecedented wage and salary increases for its tens of millions of workers, as well as managers. Also closing the cost advantage gap has been the higher prices over the lengthy transportation routes to the U.S. 

In manipulating currency changes to its advantage, China is attempting to replace the dollar exchange with its indigenous currency in world trade and swaps. This would carry the double negative of bringing down the dollar’s value, as well as elevating its yuan to the top rung of world currencies. In doing do, China would achieve the dual purpose of creating domestic value as well as weakening the world’s dollar position, thereby eventually achieving its long-term advantage in becoming the world’s number one economy by mid-century.

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Morrie Beschloss

Morris R. Beschloss is a global economic analyst, award-winning long-term top business executive, and avid blogger.

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