While the rest of the world licks its wounds from the self inflicted economic debacle of recent years and forces austerity and cuts on its people, China has not only taken a large step towards making the Yuan a reserve currency it has also announced that it is increasing its defence budget by 12.7%.

China has long had an ambition for its currency (Renminbi) to become a world reserve currency. Renminbi ('people's currency') is the official term for the Chinese currency with ten 'Fen' equalling one 'Jiao' and ten Jiao equalling one Yuan.

In a statement that many have missed and neatly translated and summed up by Reuters 'China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currencys international role. In a statement on its website www.pbc.gov.cn, the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily'.

With their plans to open up more to imports as well as base growth on internal Chinese consumption we may well see the Yuan becoming more and more attractive.

But China has also decided to increase its defence spending while other countries like the UK are desperate to scale theirs back. The increase would take China's defence budget up to £56 billion ($91.5 billion). Although this is still small compared to the US defence budget of around $600 billion (depending on whether you include overseas contingency operations or not), it is significantly more than the UK's (soon to be cut) £36.9 billion.

So, not only is China growing in economic might it is also gathering military clout with many analysts believing that the publicly stated defence budget is below actual spend. Another growing military power being India, which has just increased its defence budget by 11.6% to £22.4 billion with some saying that this is being done to counter China's growing strength.

Welcome to the two new arms races, one to the top and one to the bottom.

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