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China not banking on dollar

posted 24 Aug 2011, 08:33 by Mpelembe Admin   [ updated 24 Aug 2011, 08:35 ]
China is opens up the yuan to investors over fears the dollar may have lost its appeal as a global reserve currency following the U.S. debt rating downgrade.
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WORLD-CHINA CURRENCY -  For the last forty years the world has been banking on dollars.

But in that world, the U.S. credit rating was top notch.

Now central bankers are starting to think again -- and leading the way is China, the globe's largest foreign holder of dollars.

Jim O'Neill is director of Goldman Sachs Asset Management.

JIM O'NEILL, DIRECTOR, GOLDMAN SACHS ASSET MANAGEMENT, SAYING:

"They've taken the downgrade and the events surrounding it -- perhaps most importantly the fresh disappointing U.S. economic data -- as a further message that they've got to get on and become more dependent on themself. And I think growing the use of the RMB is part of that."

About 70 percent of China's 3.2 trillion dollars of foreign exchange reserves are in dollar assets.

And new plans to open up the yuan to investors in Hong Kong could start to reduce that.

But David Marsh from the Official Monetary and Financial Institutions Forum, says it could all turn into a fight -- to topple the dollar as the world's reserve currency.

DAVID MARSH, CO-CHAIRMAN, OFFICIAL MONETARY & FINANCIAL INSTITUTIONS FORUM, SAYING:

"The reason why the Americans have been able to live beyond their means and run up very large current account deficits in recent years is because they do have a reserve currency. So you're not going to get them to give that up voluntarily because there is something about this exorbitant privilege which is true, they do get a great deal of benefit out of this. Therefore they will only give this up after a real fight, so therefore the Americans do need competition whether from the yuan or from the euro or from something else. At the moment they're not really getting it."

But with the euro looking shaky and the dollar in the doldrums, China will be hoping it's the yuan that investors turn to -- as a new currency of last resort.

Ruairidh Villar, Reuters

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