The U.S. must face the reality that the Chinese currency will become one of the world's reserve currencies. The U.S. must also realize that China's intention is to have the renminbi eventually compete with the dollar in world markets.

According to Bloomberg News, "International Monetary Fund representatives have told China that the yuan is likely to join the fund's basket of reserve currencies soon...a move that may make more countries comfortable using the unit or including it in their foreign-exchange holdings."

The currencies now included in the IMF's basket of reserve currencies are the greenback, the pound, the yen and the euro.

"The IMF has given Chinese officials strong signals in meetings that the yuan is likely to win inclusion in the current review of the Special Drawing Rights, the fund's unit of account," the Bloomberg report said.

"'Prospects for approval seem to be favorable,' said Otaviano Canuto, executive director at the IMF for 11 countries including Brazil," the report also said.

Recent actions on the part of the People's Bank of China seem to have convinced officials at the IMF that China means what it says in creating a more "market-determined" exchange rate. Two of these moves were the efforts made by the PBOC in August to make the renminbi more responsive to market factors and the sale, which took place last week in London, of bonds denominated in the Chinese currency.

One could argue that China has a long way to go to compete with the dollar in global markets, but remember, the Chinese do not have to achieve this next year. They can be patient, aiming for the long term.

Still, China's renminbi has become the fourth most used currency in terms of global payments, with a 2.79% share in August, surpassing the yYen.

The U.K. cannot achieve the scale of the Chinese economy, so the pound is not seen as a longer-term competitor for the top spot. And, the European Union has too many political problems that limit the potential strength of the euro.

The Chinese are ambitious enough to see the road open to eventually being able to challenge the position of the U.S., particularly if the U.S. continues to follow policies that ultimately depreciate the value of the US dollar as it has over the past 55 years.

China's Communist Party is meeting this week, and it is expected to produce an economic blueprint for the next five years.

Jeremy Page and Mark Magnier write in the The Wall Street Journal that the hoped-for outcome of this week's meetings are a reformed government with a reduced role for the state in the evolution of the economy.

There is even some evidence that the Chinese will modestly lower their growth expectations so that the government can keep its eyes on the structural reform of the economy rather than panic if the higher growth targets are not being met.

These structural reforms of the economy are crucial to a plan to make the renminbi a real competitor to the dollar.

A strong currency must have the monetary and financial support of the government to achieve the trust that is needed in a currency if it is to be among the top currencies in the world. But, a strong currency also needs economic policies that emphasize the growth in productivity in order to achieve and maintain competitiveness in world markets.

The Chinese seem to understand this.

Do the leaders in the U.S. understand this?

Chinese leaders are talking about the strong currency, the monetary and financial policies needed to achieve and maintain a strong currency, and the structural reforms to the economy needed to support all this.

There seems to be little or no discussion of this nature going on within the U.S.

The discussions in the U.S. have to do with maintaining high levels of employment and low levels of inflation. These are the same discussions that have gone on for the past 55 years, the same period over which the dollar has depreciated.

Continued discussions of this nature will not keep the dollar competitive with a determined effort by the Chinese to produce a strong international currency.

Remember, the Chinese are not planning to achieve these goals in the near future, so there is time for leaders in the U.S. to respond in kind. But U.S. leaders are going to have to understand the situation and begin to discuss what they need to do to face this challenge.

Might as well start talking about it right now.

 

 

  This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.