Will China's Pension Crisis Keep the Yuan from Becoming a Global Reserve Currency?

As reported in the Financial Times, Chinese officials were using the government shutdown in the United States to push for greater usage of the Chinese currency, the yuan, as a monetary unit for the settlement of transactions around the world.

A major part of the lobbying effort pointed to the fiscal irresponsibility of the United States, as manifested by its enormous debt and the stalemate in Washington, DC.

For the People's Republic, however, the woes of its pension systems could undermine efforts to have more parties utilize the yuan as a medium of settlement, least of all threaten the U.S. dollar in its role as the global reserve currency. 

The pension system of China is trillions in debt, with low returns and a huge demographic crisis. The country's "one child" policy has also created a future where a small group of workers will have a huge retirement burden to shoulder. In addition, there is no mass immigration to help China revitalize its workforce.

The sheer size of the labor market in China, the most populous country on earth by far, will make any corrections very difficult. It will also complicated any move to have the yuan become a global reserve currency.

China's attitude has been it has a far more responsible financial structure than the United States. And there is much to buttress that contention. China has the world's highest savings rate, more reserve holdings than anyone else, the biggest international trade surplus of any nation and the largest economy as measured by purchasing power -- that is growing three times faster than any other major country.

But it also must import much of the commodities needed for its economy, making the country vulnerable to rising prices. In addition, the best students in China leave for the United States and other countries to achieve the best university education, evincing a fundamental weakness in its social structure and business competitiveness.

There are also inflation concerns and banks with bad loans that have still not been dealt with responsibly.

Domestic turmoil in China is also very threatening to the current political leadership.

In a Bloomberg Businessweek interview, United States Ambassador Gary Locke stated Beijing is “very fearful” of a Chinese repeat of the Arab Spring; a fear that has led to a “significant crackdown on dissension.” That is hardly propitious for the acceptance of the yuan as a global reserve currency unit to replace the U.S. dollar, when China's rulers are worried about their hold on office.

There are changes coming to the Chinese pension system, and the rest of its economy, that can be very profitable for long term investors, although hardly favorable for a greater international role for the yuan.

Beijing will have to force more of its populace to take responsibility for financing their own retirement. As a result, Chinese dividend paying stocks such as China Mobile CHL, the world's largest mobile phone company, along with CNOOC CEO, the state owned oil company and Seaspan Corp. SSW, will become more popular. This is hardly a novel situation; remember that dividend income from BP BP is a significant part of the British retirement system.

With all of its economic and fiscal problems, especially from its pension system, the yuan will not be replacing the U.S. dollar as the global reserve currency anytime soon. But to provide retirement income, it is likely that more Chinese will turn to stocks with high dividend yields, as have the British with BP, and others around the world, including the United States. Investors can profit from that trend with shares of income stocks from China such as Seaspan Corp., China Mobile, and CNOOC.