The Chinese Are Coming

This week there was a very important event that the press and most analysts seem to have completely missed. The Chinese have begun to issue international bonds denominated in yuan. This is an incredibly important step towards becoming a player in the global financial markets.

At present the markets are controlled by the major exchanges in Europe, Japan and the United States. The dollar is the reserve currency of the world and because of this status the United States has the ability to print money in an uncontrolled fashion and get away with it. This is all about to change.

In order for the Chinese to establish a credible currency that could one day challenge the dominance of the dollar they need to have a large float of the currency. The first step towards this is to open their markets to international investors by selling bonds to foreigners. Creating the first bonds this week is a step in that direction.

While it will take time to supplant the dollar, the Chinese have shown their intent and dislike of being controlled by fluctuations in United States policies. Now I am not suggesting that the yuan takes the place of the dollar outright but I do believe that in the not too distant future the dollar will be replaced as the currency of choice in certain parts of the world and that accepting yuan, euros or dollars will be just as acceptable as the dollar is today.

Once that happens, the United States will lose its ability to print money recklessly and will need to become far more austere in order to keep its place in the global hierarchy. When this happens the pain of repayment will be upon us. Let us hope that our leaders can preempt this and begin to implement the measures that we require today - but I doubt it.