Got Yuan?

For its U.S.-based customers the Bank of China has begun allowing trading in the Chinese currency, the yuan.  This is clearly a long-term focused goal of trying to make the yuan a competitor for the U.S. dollar as the global currency in which trading is conducted.

Importantly, to make this a reality the Chinese are going to have to let the yuan rise in value relative to the dollar, the euro, and the yen.  Right now the yuan is held at a fixed exchange rate relative to other currencies and is not allowed to appreciate.  This makes Chinese goods artificially cheap.  That means there is lots of buying of those goods with non-Chinese currency.  That means that China has accumulated massive, massive reserves of the money of other countries.  In exchange, China invests those monies in the debt of the nations who have these massive trade deficits with it.

So the announcement that your average Jane and Joe can trade up to $4,000 worth of yuan is a harbinger:

1.  The Chinese are going to eventually be the largest economy on the planet, and…

2.  Eventually the yuan will be allowed trade freely and at that point it will very likely appreciate in value rapidly.

3.  A moment where the Chinese economy will have to handle the rise in prices of its goods and services.  That is, a moment where they have to handle contraction.

This news is a milestone, but the distance to be traveled promises to be long.

Jason