I remain in “negative awe” of China bulls who think the yuan is going to soon replace the US dollar as the world’s reserve currency.

As I have pointed out before – China’s bond market is nowhere big or liquid enough; China’s property bubble is the world’s biggest; China’s shadow banking system is on the verge of implosion, and Chinese growth is imploding.

Readers know full well that I am not prone to US flag-waving.

That said, the US has the most open, most free capital markets of any major country. In contrast, China has capital controls reminiscent of two-bit South-American countries (amongst numerous other significant problems). 

Monetary Smuggling

Reuters reports How China’s Official Bank Card is Used to Smuggle Money.

Growing numbers of Chinese are using the country’s state-backed bankcards to illegally spirit billions of dollars abroad, a Reuters examination has found.

This underground money is flowing across the border into the gambling hub of Macau, a former Portuguese colony that like Hong Kong is an autonomous region of China. And the conduit for the cash is the Chinese government-supported payment card network, China UnionPay.

In a warren of gritty streets around Macau’s ritzy casino resorts, hundreds of neon-lit jewellery, watch and pawn shops are doing a brisk business giving mainland Chinese customers cash by allowing them to use UnionPay cards to make fake purchases – a way of evading China’s strict currency-export controls.

On a recent day at the Choi Seng Jewellery and Watches company, a middle-aged woman strode to the counter past dusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000 ($50,000) in cash. She signed a credit card receipt describing the transaction as a “general sale”, stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door.

The withdrawal far exceeded the daily limit of 20,000 yuan, or $3,200 (1,925.62 pounds) (1,925.51 pounds), in cash that individual Chinese can legally move out of the mainland. “Don’t worry,” said a store clerk when asked about the legality of the transaction. “Everyone does this.”

Yuan to Replace US Dollar as Reserve Currency?

With capital controls, political controls, no freedom of press, massive problems in shadow banking, massive problems with housing, entire malls and even cities that are unused, the yuan is nowhere near being able to replace the dollar as the world’s reserve currency.

China is a decade away at a bare minimum, and that is if everything goes perfect for China (which it won’t). Due to lack of political freedom, lack of a liquid bond market, and lack of essential human and property rights, for the yuan to replace the US dollar as world’s reserve currency will take decades.

Given that a major global currency crisis is highly likely long before that (with numerous possibilities as a result), I suspect it will never happen. Rather some other monetary system will be in place.

Bretton Woods is on its last legs. What’s next is unknown. It may be gold or crypto-currencies,  but it isn’t the Yuan.

Mike “Mish” Shedlock