The excitement began in earnest with this Wall Street Journal article about China wanting to diversify its reserves away from the U.S. dollar. Zhou Xiaochuan, the head of China’s central bank, had given a speech that listed problems with the dollar as a dominant reserve currency and obliquely referenced an old idea of John Maynard Keynes for a global reserve currency called the “Bancor” backed by a diversified basket of commodities. As news came in April that China had been buying up copper, theories began to abound about China’s plans for the stockpiled metal and potential moves toward backing its currency with commodities instead of U.S. dollars. By switching away from U.S. Treasury securities and toward commodities or other currencies as a reserve investment, China would simultaneously weaken the U.S. dollar and strengthen its own renminbi (also known as the yuan) over the long term. When we also consider China’s strong economic growth, small deficits, and large net exports, the future of the renminbi looks bright. However, that does not mean it will make a good investment.
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