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A Confucian conundrum for China

The Chinese own more United States Treasury bills than can be counted in a lifetime, and as the dollar printing press roars on, the rulers of the People’s Republic are getting nervous. They would like to see another reserve currency, and quite like the idea of it being the renminbi. After all, the euro and the yen are really too small to fulfill the role, while sterling is just small change.

So China has this week decided to issue its first sovereign bonds denominated in its own currency which foreigners can buy, at least in small amounts. After all, if the world is to hold renminbi reserves, it needs a proper market in its central bank IOUs.

So far, so logical. But there’s something odd here. Buyers of the bonds must first acquire the right currency, which in practice means selling dollars to buy the renminbi. The ultimate buyers of those dollars will be the Chinese, who will then buy yet more US T-bills, making the pile even higher.

International investors will welcome a few Chinese government bonds in a diversified portfolio, but while the vast trade imbalance between China and the US persists, issuing them will do nothing to ease the upward pressure on the renminbi, or to reduce that bill mountain.

Stiglitz not to be outdone by Pimco, Buffett

The future of the dollar has been all the rage this week as Warren Buffett and Pimco portfolio manager Curtis Mewbourne chimed in about its demise as a store of value. It somehow seems appropriate then that Joseph Stiglitz, the Nobel Prize-winning economist who is no stranger to the debate, would weigh in on the need for a new reserve currency at a conference in Bangkok.

From the Reuters article:

A new global reserve system is needed after the global financial crisis exposed the U.S. dollar-based system as flawed and risky, Nobel Prize-winning economist Joseph Stiglitz said on Friday.The “dollar now is yielding almost zero return,” Stiglitz said in a speech at the United Nations regional headquarters in Bangkok. “The current global reserve system is fraying. It’s falling apart. The issue isn’t whether we go to a new system. The question is do we do so in an orderly or disorderly way.”