The International Monetary Fund (IMF) today announced that, effective October 1, 2016, the Chinese Yuan (Renminbi ...) will be a "world reserve currency" alongside the Dollar, the Pound, the Euro, and the Yen.

The effective-date is less important than the decision itself.

For many decades, China has been "the world's manufacturer," largely because of the fact that it couldn't be paid directly in its own national currency. International transactions had to be cleared in someone else's currency (usually, the US Dollar) to subsequently be converted to the Yuan. This arrangement was especially beneficial to China's number-one customer, the United States of America ... who literally printed the Dollars needed to buy "all those things." The arrangement was so "one-sided beneficial" for the USA that she cheerfully shut down virtually all of her own domestic production in favor of "We Sell For Less, Always™."

Traders now know that it is certain that the United States, which now commands about 55% of the intermediary-currency business, now stands to lose all of that business, and with it, the entire "get out of jail free" goodness that it had attached to "Made In China."

Traders also know ... as China does, too ... that the United States does not today possess any comparable manufacturing ability. Nor has it invested in vocational education. In order to continue to supply itself with necessities as basic as underwear and socks, much less virtually all of the microelectronic gadgets upon which its so-called "new economy" depends, the USA will have no choice but to continue to source these products from China, but now at China's price, denominated in China's currency. Furthermore, since the Chinese economy is much larger than that of the United States, it is likely that the "presumption of necessity" for using "the Almighty Dollar™" will very quickly erode in the world's perception. After all, "the BIG Dog calls the shots, not the over-the-hill b*tch whose glory days are passed."

The impact of this decision can be expected to occur very swiftly indeed, because contracts are negotiated years in advance. It can be fully expected that contracts scheduled to come due after this date will be re-negotiated immediately, to guard against the possibility that the present (but now, no longer necessary ...) intermediary currency might lose value against the now-legal direct transaction.

To further add insult to injury for the United States, the IMF itself will likely be obliged to move its headquarters to Beijing, since IMF rules require it to be hosted by the most economically powerful of its members.

Strangely, "what this means for the USA" is that she will fairly-immediately and un-ceremoniously be compelled to become what she famously once was: a largely self-sufficient manufacturer of "damn near everything." But she is woefully unprepared for this. "Rosie the Riveter" is likely to be nowhere to be found in the coming year.

First, isn't yuan pegged to the dollar?
Second, existing contracts probably set USD as currency.
Third, China cannot do anything sudden because they still have large USD reserve, they are working on reducing it by buying gold, but they are quite not ready yet.
Fourth, it is not China's interest to shut down dollar based trades with USA. This will reduce significantly demand for their products and will very likely lead to civil unrest in China.

However, one day China will be ready to un-peg the yuan and this is the end of USD as world currency. Probably will take a year or two to get there.

Obviously, the Yuan has been "pegged to the Dollar" so-far only because it had to be.

China had to peg its currency to "the 'Big Dog' (sic)," until the world economy finally acknowledged that China was now, unquestionably, "the Bigger Dog."

No, it is not a simple matter, before or after this change. (Human(!) relations rarely are... heh.)

After October 1st next, China will no longer have to "hold US$ debt" because the debt can now be re-stated in its own currency. Yes, it will still be "a debt," but it will no longer be one that can be manipulated by the debtor. (China presently holds substantial "debts" in all four of the present "reserve currencies." The USA is by no means only one ... heh ... that has been taking advantage of this situation.)

When judging the ebb-and-flow of world affairs, you have to remain focused on actual trade, not currency units. Obviously, for the past thirty years or so, China has been "leveraging" this on-the-books-attractive state of affairs for its own advantage, until now the pendulum is swinging the other way. (The "US$ debt" is the weight pulling against that pendulum.) The United States is presently "drugged," but it could snap out of that stupor at any unpredictable moment. China's entire advantage depends upon persuading its customers that "10,000 to 20,000 sea miles" is preferable to "a supplier across town."

The "short-term pain" that is soon to be felt by "China's present customers" is very-definitely a product of the absurdity of them having been "China's customers" in the first place. ("Why should an American company, of all people, buy from '20,000 sea-miles away,' when it once could have bought that underwear from a company next door?")

Therefore, China cannot afford "not to be mindful" of the present imbalance in its customer portfolio. Most of its customers are foreign, and this is a good thing since foreign demand presently outweighs domestic ... even though China's "domestic" is many times larger in volume than everyone else's. All of those foreign customers do possess alternative capabilities, even though they have momentarily been "drugged" into ignoring them.

Thus, IMF's long-anticipated decision is "a two-edged sword."