Currently, investing in foreign exchange reserves is dominated by the United States dollar, the euro, the yen and the British pound.
Currently, however, the central banks serving these currencies are pursuing, or, have pursued a policy of credit inflation to combat the disinflation or deflation in their respective countries or geographic areas. The European Central Bank and the Bank of Japan are in the process of quantitative easing, while the Bank of England muddles along and the Federal Reserve System in the United States seems to remain clueless.
The Chinese renminbi, on the other hand, is on the verge of becoming a reserve currency. Over the past four or five years, the Chinese have been doing what is necessary to bring it's currency to the edge of recognition as a reserve currency and seems intent on achieving that goal along with becoming a major player in world financial markets.
China is moving to allow its investors to move money into world markets, is seeing its currency being used in more and more trade and currency transactions, and is going to have some of its stocks listed on the MSCI index of emerging market stocks, something the Wall Street Journal believes "could carry broad implications for investors."
The value of the renminbi against the U.S. dollar rose during the early years of the current economic recovery and has remained roughly constant with the dollar over the past three years. The strength in the currency has allowed the International Monetary Fund to declare that the renminbi is not undervalued anymore.
This has tremendous implications for the future.
In terms of the "Big Four", the United States, the eurozone, the Japanese, and the British, only the Europeans really give any indication that they will move back into a position supporting a stronger currency. Mario Draghi, president of the European Central Bank, only reluctantly moved to a policy of quantitative easing after doing everything he could to avoid such a move. I believe that he will very quickly move back to a stronger Euro as soon as the threat of deflation leaves the eurozone. Furthermore, the major leaders of the European Union very much want to keep inflation under control.
The Japanese and the British will not push to strengthen their currencies as their economies continue to remain relatively weak.
The current U.S. administration continues to desire a policy of credit inflation, and, if Hillary Clinton were to be elected president in 2016, this policy would likely continue.
If this is the world that is evolving, then it seems that this is almost a perfect scenario for the Chinese currency to become a major player.
The eurozone is well intended, but it still must forge a political union to support its currency union if it is to be competitive in global currency markets. The ultimate outcome of the Greek test is going to be instructive concerning the ability of the European Union to pull together and move forward on the political front.
China stands to benefit greatly from the growing importance of its currency. For one, as the currency moves into reserve currency status, its value will become more stable. This will enhance its use as a reserve currency and will increase the trust that other nations will have in the use of its currency.
Second, China will be able to reduce the relative amount of reserves it has on hand. As trust builds, China will be required to hold fewer reserves as a show of its financial strength. These funds can then become available for other Chinese investment purposes, like the Asian Infrastructure Investment Bank, the AIIB.
Third, the reduction in its own reserves can allow the Chinese to ease up on constraints on domestic spending, especially on consumption expenditures. This will only strengthen China's economy.
Fourth, the realignment of international currencies will only open the door for other currencies becoming reserve currencies. An economically improving India would love such an opportunity.
These major changes to the world order will force others nations, like the U.S., to re-address the economic policies it depends upon so as to be more competitive in such a global environment.