January 15th, 2011 10:51 EST
Move Signals Increased Concern About U.S. Currency Devaluation
WORLD BANK ISSUES 1ST BOND IN YUAN
The World Bank issued its first bonds denominated in China`s currency, the yuan, in a further indication last week that the dollar is slipping in status among international bankers.
Buyers of the 500 million ($76 million) two-year bonds were mainly Hong Kong-based financial institutions, corporations and wealthy individuals, the Associated Press reported.
China is about to become the third most important voting power in the World Bank, after the United States and Japan, as a result of a reorganization last year that was designed to give developing nations more say in the management of the World Bank.
Even though China still prevents the yuan from being freely traded in world currency exchanges, the decision by the World Bank to issue Chinese yuan-denominated bonds marks a growing interest in the World Bank to support the development of a yuan market internationally.
The move also provides yet another indication that international bankers are concerned that mounting U.S. debt and the move of the Federal Reserve to continuing to buy Treasury debt signal an unannounced devaluation of the dollar that the Fed may be engineering behind closed doors.
China and Russia drop dollar
In November, Russia and China announced a decision to abandon the dollar in bilateral trade dealings, resolving instead to use their own currencies.
The decision resulted from a bilateral meeting in St. Petersburg, Russia, between Chinese Premier Wen Jiabao and his Russian counterpart, Vladimir Putin.
The move marks a continued departure from utilizing the dollar as the standard of international trade, a position the dollar has held since the end of World War II.
"This latest move - a continuation in a series of efforts by both countries to move away from U.S. dollar usage in international trade - further threatens the dollar`s reserve currency status," Hao Li wrote in the International Business Times. "China and Russia are gradually revolting against the U.S. dollar."
At the same time, French President Nicolas Sarkozy proposed having the yuan enter the pool of currencies in the International Monetary Fund`s Special Drawing Rights, as a step to wean the international monetary system off its reliance on the dollar, Reuters reported.
"The smart thing for the IMF to do would be to put the yuan in the SDR basket today," Jim O`Neill, chairman of Goldman Sachs Asset Management, told Reuters. "Then the SDR would have some obvious appeal to the private sector: This could quite rapidly open the door to less dependence on the dollar."
According to Reuters, the SDR currently accounts for only 4 percent of global reserves, or $308 billion. The four currencies that make up the SDR - the euro, the Japanese yen, the pound sterling and the U.S. dollar - account for only 46 percent of world trade.
A five-year review of the SDR basket completed this month excluded the yuan because it is not freely traded on international currency exchanges. The admission of the yuan into the IMF basket comprising the SDR would be a major accomplishment for yuan and a major setback for the dollar.
China objects to Fed`s Quantitative Easing 2
At the G20 meeting in South Korea earlier in November, China denounced the Federal Reserve`s plan to pump $600 billion into the U.S. economy in the next eight months through buying Treasury Bonds, in a plan known generally as "Quantitative Easing 2."
Despite grumbling about how the Fed is debasing the dollar, China, the biggest holder of U.S. Treasury securities, boosted its holdings in September, for the third straight month.
China`s holdings of Treasury debt rose to $883.5 billion in September, a 1.7 percent increase from August.
On October 14, 2010, Andrew Batson and Aaron Back reported in the Wall Street Journal that China`s foreign-exchange reserves topped $2.648 trillion at the end of September, "in a record surge" that makes China`s foreign-exchange reserves the largest amount ever accumulated by any nation.
Tensions with the Obama administration continue over China`s refusal to allow the yuan to freely float on currency-exchange markets.
The yuan has risen only about 2.3 percent against the dollar since June, and many U.S. politicians still view China`s currency as being kept intentionally undervalued, as part of China`s policy to boost exports.
China has repeatedly insisted its central bank will make only "gradual changes" in the exchange rate.
China cut its holdings of long-term Treasuries by $21.2 billion in June, reducing total Chinese holdings of Treasury debt to $839.7 billion, Bloomberg reported.
China has been diversifying its foreign-exchange reserves away from the dollar, in favor of the euro and gold, since June 2009, when China`s holdings of U.S. Treasury debt peaked at around $950 trillion.
ABOUT THE AUTHOR: Jerome R. Corsi received a Ph.D. from Harvard University in political science in 1972. He is the author of the #1 New York Times bestselling books THE OBAMA NATION: LEFTIST POLITICS AND THE CULT OF PERSONALITY and the co-author of UNFIT FOR COMMAND: SWIFT BOAT VETERANS SPEAK OUT AGAINST JOHN KERRY. He is also the author of AMERICA FOR SALE, THE LATE GREAT U.S.A., and WHY ISRAEL CAN`T WAIT. Currently, Dr. Corsi is a Senior Managing Director in the Financial Services Group at Gilford Securities as well as a senior staff writer for WorldNetDaily.com.
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