The currency wars

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China: The new financial superpower?

By Sameer Siddiqui, Contributor


Recently, some earth-shaking news came out from China: That they would start using gold-backed yuan as a means for the oil they would purchase. With the increasing debt of the US, I believe this could propel China as a global financial superpower and cripple the US economy.

The global confidence in the US dollar is reducing day by day because of the state of the US economy. The US is at a critical juncture. Their debt levels are out of control, and China is lending to them. The US dollar has two primary functions; it is the official currency of the US, but also, more importantly, it is a global reserve currency and used to settle international transactions. Everyone wants dollars not out of some desire for artifact collections; rather without dollars no country can purchase crude oil and settle international transactions. I think this is the only reason the US economy is still stable, but it might not be for much longer.

According to, many countries are increasing their gold holdings. China’s currency, the yuan, is artificially devalued by China so that their exports remain cheap. However, the real value of the yuan is much higher.

Since China is the worlds largest crude oil importer, it can say to its suppliers like Saudi Arabia, Iran, and Russia that it would pay for the oil not in US dollars but in Chinese yuan, thereby increasing the global demand for the yuan. This is the last thing the US wants as it could set off a chain reaction and further increase the value of the yuan over the US dollar.

I believe another reason the US economy is still stable is because they have large trade deficits. They have these trade deficits because every country requires US dollars for purchasing things it wants in the world market. The easiest way it can get dollars is if it exports goods to the US and gets dollars payments in return. Now, if the US wants a trade surplus it would mean that other countries would pay for US exports in dollars reducing their own dollar reserves. This is the major drawback of functioning as a global reserve currency: You can only sustain it with trade deficits; but for how long?

I believe that the man who sits in the oval office is highly unpredictable, and China knows this well. China has accumulated vast US government bonds and could cause a financial earthquake in the US if they starts selling them. I think the greatest appeal of the current US president is his patriotism towards his country. He would not sit idle while other countries take away American jobs. He could start imposing tariffs on Chinese imports or force China to allow American exports into their domestic markets. I believe as of now, he has the upper hand in deciding if China will become the next global financial superpower.