China Largest Holder of US Debt

Since the end of World War Two China has achieved astounding growth. China recovered from the devastation of the war and survived the excesses of the Maoist regime. China is now a modern industrialized nation with a thriving industrial sector. At present China is the largest holder of US debt. The actions of the Chinese government have had an affect on global currency exchange rates and now China is suggesting that its currency, the Yuan, could become a reserve currency.

Chinese Alarmed by Mounting US Debt

The Yuan has gained 21% against the US dollar since China dropped the Yuan’s fixed currency exchange rate in 2005. Despite the gains Chinese officials are alarmed at mounting US debt during the current global recession. For the Chinese the possibilities of a devalued US dollar seem very real. Last March China urges the g 20 nations to adopt a “super-sovereign reserve currency.”

Yuan Kept Artificially Low

Many believe that the Yuan has been kept artificially weak to give China a trade advantage. A Chinese official said that by 2020 the Yuan could make up 3% of global currency exchange reserves. In Hong Kong a pilot program will start using the Yuan to trade with companies in Guangdong province. China has arranged Yuan swap deals with six central banks totaling 650 billion Yuan ($95 billion USD)

Yuan Could Displace Japanese Yen

At present the idea of the Yuan as a reserve currency is mostly speculative but given China’s industrial power the idea should be taken seriously. Should the Yuan account for more than 3% of global reserves it would become possible for the Yuan to displace the Japanese Yen as fourth largest currency putting the Yuan behind the pound, euro, and the US dollar. Zhang Guangping, vice-head of the Shanghai branch of the China Banking Regulatory Commission stated, “We have the conditions to reach such a proportion.”