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Chinese Renminbi Overtakes The Euro

|Includes: Market Vectors Chinese Renminbi/USD ETN (CNY), CYB

The Chinese Renmimbi has hit a new milestone, as it overtook the Euro as a trade currency. The dollar's share has fallen to 85% of trade. The CNY share of trade has risen from just 2% two years ago to 9% today.

Four developments are favorable for the Yuan.

1. The Chinese economy is growing at twice the speed of America's economy. China claims a 7% growth rate for its country and the US 3% for its country. I don't suggest you believe either number as both are likely inflated by governments wanting to retain power. However, the relative strength is likely true.

2. China continues to be a net exporter to Europe and the US. When I was in Romania in October, my inlaws had a shop full of Chinese goods. This is the state throughout Europe.

3. China's economic and military strength make it a major world power. China is the largest owner of US debt. This means that the fortune of the two countries is inextricably tied. China can influence US policies under threat of selling debt. Selling the debt would lower its price and raise interest rates. This would hurt the fragile US economy. However, a disorderly sale of debt is not in China's interest because that price decline would lower China's wealth.

4. Momentum is good. Over the past 5 years, the Yuan has been appreciating 1.5% a year against the dollar, limited by the Chinese government. While this is nothing compared to the past few years of the stock market, its better than the performance of the Euro which is down as much. China has stated that it would start loosening up on the rate even more. Hence, the 2.5% a year CNY has been appreciating over the past 2 years should even increase.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.