Foreign PE investors back yuan as reserve currency

By Cong Mu

The yuan should become an international reserve currency in five to 10 years to prevent the country from paying for the mistakes of US economic policies, a London-based private equity (PE) manager said in an interview Sunday in Beijing.

In the short term, Derek Han, chief executive officer of the Blue Oak Capital (BOC), said the country, under international pressure, will gradually allow its currency to rise 2 to 3 percent in value.

But the country will ensure that it does not greatly affect export industries, Han said.

Following US President Barack Obama's trip to China, two US senators, Charles Schumer, and Lindsey Graham, asked the Commerce Department Thursday to investigate alleged manipulation of the yuan, saying that the currency is undervalued to give Chinese exporters a global price advantage but costs US jobs.

The request was declined by the department. Han also believed the accusation was unfounded since China has been financing US borrowing and over-consumption for the past decades, while the Chinese people saved.

US politicians should stop pointing fingers at China instead of addressing their own inability to clean up their balance sheets, Han said.

China is the largest foreign holder of US debt with $798.9 billion of US Treasuries as of September, while the US federal deficit hit a record $176.4 billion in October, according to the data released by the US Treasury Department.

Despite the talk of economic recovery, Han believes the world is still deep in crisis, which is structural rather than cyclical.

However, the US lacks the incentives to make a structural change because it can easily shift its burden to other countries by exploiting its currency's status as the world reserve currency, he said.

It is possible that the US will use inflation to depreciate its debt as it has historically used the same tool to lower its debt to gross domestic product (GDP) ratio from 125 to 60 percent, Robert Mundell, a Nobel prize winning economist, told a forum over the weekend, cnforex.com reported.

As of Sunday, the US national debt is over $12 trillion, about 84.5 percent of the US GDP in 2008, according to usdebtclock.org.

Mundell suggested that, by 2011 the yuan should take up 10 percent in the composition of the Special Drawing Rights (SDRs), which is an international reserve asset created by the International Monetary Fund (IMF).

The US was perhaps the most favorable destination for investment 10 years ago, but now China has become the magnet for its strong fundamentals and growth potential, Han of BOC said.

Agencies contributed to this story
 

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