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article imageChina will become world's second largest economy Special

By Andrew Moran     Oct 20, 2009 in Business
For many investors, China is the 21st century version of 20th century America and 19th century Great Britan and so on. Financial analysts believe China will takeover Japan and become the world's second largest economy but the Yuan could be a problem.
Within the next two years, China will become the world’s second largest economy as the country posted double-digit growth for four years prior to the global economic downturn and again during the first two quarters of 2008. All these numbers point to the country’s Gross Domestic Product sitting at $4.3 trillion.
However, one of the underlying factors into Chinese growth is their currency; Yuan Renminbi. Dong Tao, a Hong-Kong based economist for Credit Suisse, told AFP, “The only thing standing between China and Japan in terms of who is number two is the Japanese yen. Without the yen factor, China is already the world number two.”
The United States Treasury believes, according to Business and Leadership, that there is a lack of flexibility with the Chinese Yuan and thinks that it is extremely undervalued. Since July 2008, the Yuan has been pegged to the US Dollar. The Japanese Yen is generally seen as a safe-haven currency worldwide and it also remains high against the US Dollar. $1USD = 6.83CNY.
From 2006 to 2009, China’s reserves increased from $1 trillion to $2.23 trillion, as reported by The Wall Street Journal. Reports show that money keeps pouring into China, which is a country that recovered very quickly as the decline in exports improved from August and imports only fell down by 3.5 per cent.
Since the beginning of the economic collapse, countries like Russia and China are calling for a new global reserve currency and some Gulf nations want to trade oil in different currencies such as the Yuan or the Yen, possibly even gold bullion, as Digital Journal reported earlier this month.
The People’s Republic of China just spent an astronomical amount of stimulus --- $586 billion--- but they can afford such a sum because the high quantity of reserves they have.
In an interview with Digital Journal, Zaman Monirusz, CEO of The Bullion Mart in Toronto, believes that the Chinese Yuan will continue to increase in value and thinks that the Chinse government might look into backing their currency by precious metals such as gold.
He further added that the Chinese government will divert a lot of their funds into the metals sector, especially copper. "Years ago, the german government diverged their funds into mining copper. Hopefully China will continue the same way by diverting funds into gold but, in the sense, they might move their investments from the US treasury in the future."
Concluding, "The US dollar will collapse when China stops buying dollars."
More about China, Chinese yuan, Second largest economy
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