Sep 062017
By Paul Ebeling on September 6, 2017 China Begins Resetting The World’s Reserve Currency System $GLD, $OIL, $CNY It is a strategic move swapping Crude Oil for Gold, rather than for US Treasuries, which can be printed at will. A report released by the Nikkei Asian Review indicates that China is prepared to release a RMB Yuan denominated Crude Oil futures contract that is convertible, aka backed by physical Gold. The contract will enable China’s largest Crude Oil suppliers to settle Crude Oil sales in RMB Yuan, rather than in USDs, and then convert the RMB Yuan into Gold on exchanges in Hong Kong and Shanghai. This is a significant step in removing the global reserve currency status of USD, and resetting the global economic and geopolitical “landscape.” Over the past several years, China has quietly established RMB Yuan-based currency exchange facilities, which has set up the ability to implement this new non-USD trade settlement financial instrument. According to the Brookings Institute, 34 Central Banks around the world have signed bi-lateral local currency swap agreements with the PBOC (Peoples Bank of China) as of the end of September 2016, including the major Crude Oil-producing countries. With this new contract, China’s largest Crude Oil suppliers will now be able to transact directly with China, and other Crude Oil importing countries, using RMB Yuan which are directly convertible into Gold to settle the trade. This is a mechanism which is likely to appeal to Crude Oil producers that prefer to avoid using USDs, and are not ready to accept that being paid in RMB Yuan for Crude Oil sales to China is a good idea yet. Since Y 1973, OPEC Crude Oil has been quoted and traded using USDs, otherwise known as “Petrodollars.” The “recycling” of petrodollars into US Treasuries has been the life-blood of the US economic and political system. In addition to reducing a major source of funding for the US Government’s enormous deficit spending, the introduction of a Gold-backed RMB Yuan Crude Oil futures contract is an important step toward removing the USD as the world’s reserve currency. More significantly it re-introduces Gold into the global monetary system. As the new Gold-backed “Petroyuan” will allow Crude Oil producers to sell Crude Oil for Gold rather than US Treasuries. Furthermore, it reduces the ability of the US Government to impose its will on the rest of the world. And is a strategic step toward not only ridding the (more…)
May 302011
The Wall Street Journal China Real Time Report China’s effort to make the yuan an international currency is running into complications, including the deeply ironic outcome that it is actually boosting the country’s massive stockpile of foreign currency. As awareness builds of these unintended consequences, prominent voices are now calling on Beijing to take a step back and slow the pace of yuan internationalization. The yuan drive is partly due to Beijing’s frustration with reliance on the U.S. dollar as a global currency in the aftermath of the U.S. financial crisis. Since it began on an experimental basis in 2009, yuan trade settlement has grown rapidly, rising more than 20-fold from a year earlier to reach 7% of China’s total foreign trade in the first quarter. But dollar dependence is proving a hard habit to kick. Yu Yongding, a former central bank adviser turned strident central bank critic, is the latest to raise questions about the wisdom of rapid yuan internationalization. Rather than reducing China’s accumulation of foreign exchange reserves, yuan trade settlement is actually having the opposite impact, and the process needs to managed carefully, Yu wrote in an essay published on Monday by the Chinese Academy of Social Sciences. This perverse state of affairs arises because people outside of China are keen to accept yuan as payment, believing it will appreciate. For the same reason, they are less keen to pay for goods with yuan — and don’t have much of it on hand in the first place. Analysts estimate around 80% of current yuan trade settlement is to pay for imports. As more and more imports are paid for in yuan rather than dollars or euros, less foreign currency is drained from the Chinese economy, leaving Beijing at the end of the day holding more foreign currency reserves than it otherwise would. Mark Williams, an economist at Capital Economics, estimates this effect contributed around $40 billion to China’s foreign currency stockpile – equal to roughly 20% of growth in the reserves– in the first quarter. That is a particularly vexing outcome for Mr. Yu, who has emerged in recent years as one of the world’s biggest critics of U.S. Treasury bonds, an asset in which a large proportion of China’s foreign exchange reserves are invested. In a separate essay last month, Mr. Yu denounced U.S. Treasury bonds as a giant ponzi scheme supported by Federal Reserve purchases. (more…)
May 182011
By Bloomberg News – May 11, 2011 Most global investors predict China’s yuan will be convertible into other currencies by 2016, with 50 percent seeing it joining the dollar, yen and euro as a reserve currency within a decade, a Bloomberg poll indicated. Fifty-seven percent of 1,263 Bloomberg customers surveyed who are investors, traders or analysts, including 58 percent of Asian respondents, said it’s likely the yuan will be convertible in five years. Nineteen percent of respondents said it will become a reserve currency in that time, with an additional 31 percent predicting that step within a decade. The decision would mark one of the biggest policy changes since China embraced private enterprise three decades ago, enabling fund managers to more freely invest in the world’s No. 2 economy. Convertibility would help unlock domestic Chinese savings, now at 75.6 trillion yuan ($11.6 trillion), equivalent to more than 80 percent of U.S. gross domestic product. “If we get to the stage that the yuan is convertible and there’s a liquid government bond market available to invest in, it would mean that the Chinese yuan becomes a possible viable alternative to the dollar,” said Mansoor Mohi-uddin, chief currency strategist at UBS AG in Singapore, the world’s third- biggest foreign-exchange trader. “The euro hasn’t been able to fulfill that.” China Advantage While the dollar’s share of global reserves fell after the euro’s 1999 introduction, it has held above 60 percent in recent years, International Monetary Fund data show. One advantage for China over the euro region would be a single national government, avoiding the disputes arising from the sovereign-debt crisis that enveloped Greece, Ireland and Portugal. China is taking steps to make the yuan more accepted abroad short of convertibility, such as setting up an offshore market for yuan transactions in Hong Kong. It has also entered into currency swaps with nations from Indonesia to Argentina, and denominated some overseas loans, including to Venezuela, in yuan. In Hong Kong, McDonald’s Corp. (MCD), the world’s biggest restaurant chain, sold yuan-denominated bonds last year. “Certainly we have seen huge steps pointing towards that direction,” said Marcelo Ricaud, a fixed-income sales manager at Standard Chartered Plc in London who participated in the poll, referring to convertibility. “It is interesting to follow the increase in volume” of the offshore yuan in Hong Kong, he said. Yuan Bonds Sales of yuan-denominated bonds in Hong Kong have climbed to (more…)
Apr 292011
The Editors World Politics Review| 29 Apr 2011 China has signed a series of currency swap agreements since 2008, most recently with New Zealand and Uzbekistan. In an email interview, Daniel McDowell, a doctoral candidate in International Relations at the University of Virginia specializing in International Political Economy, discussed China’s currency swap agreements. WPR: Why is China pursuing currency swap agreements? Daniel McDowell: There are two reasons for these agreements. First, China is concerned about dependence on the U.S. dollar, which is used to settle about half of the world’s international trade transactions. When China accepts payment in dollars, it uses some to buy foreign goods and invests a large portion of the remainder in U.S. government securities. Of course, the value of holding U.S. debt is dependent on the value of the dollar. In light of the U.S. Federal Reserve’s continued commitment to low interest rates and its second round of quantitative easing, China is worried about dollar inflation, which would reduce the value of its dollar-denominated assets. So, these currency swaps are one way of reducing Beijing’s dependence on buying U.S. debt. The second reason has to do with Beijing’s aspirations for the yuan to become a truly international currency. Currently, it has a long way to go. Beijing still does not allow the market to set the yuan’s value, preferring instead to maintain an artificially undervalued exchange rate. Consequently, China strictly limits the currency’s movement across borders, though that is slowly beginning to change. These arrangements are one step in an incremental strategy to raise the yuan’s global profile in the coming years. WPR: How effective have the agreements been at promoting international trade in yuan? McDowell: It is difficult to isolate the effects of the swap agreements alone. However, we do know that cross-border yuan-based trade has increased significantly in the past few years. In 2009, yuan-denominated trade settlement was virtually nonexistent. But 2010 saw yuan-based trade increase virtually every month of the year, totaling roughly 160 billion yuan ($6 billion) for the year. Early reports from the People’s Bank of China (PBOC) suggest that yuan-denominated trade could be on pace to triple in 2011. A large chunk of this yuan trade is with Hong Kong and Singapore, both of which have swap lines with the PBOC. WPR: What does China have to gain — or lose — from making the yuan a global currency? McDowell: Let’s start with what (more…)