Early reports from the G8 meeting suggest that the communiqué will not address the issue of reserve currency diversification. The bigger story however, is the sudden departure of Chinese President Hu Jintao who decided to return home in the wake of the worst ethnic violence in the country in years. At least 156 people were killed during a riot Sunday evening in Urumqi, capital city of Xinjiang as warring factions of Hand Chinese and the Muslim Uighur minority clashed over issues of economic fairness.
While the Xinjiang is remote and the ongoing violence there is unlikely cause any serious economic damage to China’s growth the political ramifications of the uprising could prove to be far more problematic to Chinese authorities. In recent months China has been making a concerted public relations effort to make the yuan more acceptable in settling global trade transactions subtly challenging the dollar’s hegemony as the global reserve currency. The yuan however remains a closed, highly managed, non-convertible unit of exchange and is therefore utterly impractical as a reserve substitute for the greenback.
More importantly, today’s tumultuous events underscore the fragility of the Chinese political system which could come under enormous stress if global economic rebound fails to materialize. Yesterday’s arrest of four Rio Tinto employees including an Australian national by Chinese officials as the parties negotiate a steel price dispute further undermines the notion of rule of law and weakens any serious consideration of the yuan as an alternative store of value. The latest political developments in China, therefore, are likely to temper any speculation regarding the dollar’s reserve currency status for the time being and should prove supportive to the buck as the summit progresses.
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