The People’s Bank of China, China’s central bank, has formalized its call for replacing the U.S. dollar as an international reserve currency.
The PBOC recommends a new international currency in its annual report on financial stability, issued last month.
The PBOC didn’t specifically target the dollar, but said it wants to reduce its dependancy on current reserve currencies… the dollar being the largest.
The Chinese proposal includes using a synthetic currency developed by the International Monetary Fund called Special Drawing Rights as a reserve currency that supersedes the sovereign currencies of individual countries.
The Chinese are worried that massive U.S. government borrowing for stimulus spending will lead to inflation. Since the dollar makes up about $2 trillion of China’s foreign exchange reserves, such inflation would seriously impact the value of China’s foreign exchange holdings.
The affect on the dollar of such a shift in reserve currency would be enormous… and potentially disastrous for dollar holders. One strategy being used by a growing number of U.S. investors to protect their portfolios is diversifying out of the dollar using real estate denominated in relatively strong foreign currencies.
Ronan McMahon, executive director of global property intelligence company Pathfinder Real Estate, has been a long-term proponent of such a diversification strategy.
“Diversification out of the dollar is one of the the key reasons I think international real estate is such an important part of a modern investment portfolio,” said McMahon. “The Chinese proposal is just the latest in a series of global economic events that makes non-dollar investments, especially in hard assets like real estate, so crucial in my opinion.”
McMahon said that one of the best real estate markets today, Brazil, is also denominated in one of the most desirable currencies, the Real.
“Medium term I expect the value and strength of the Real to dramatically increase the return on investments in Brazil, and especially along the north-east cost around Fortaleza,” said McMahon.
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