The latest moves towards trade in Chinese yuan sounds the early death knell of the dollar as the world’s global reserve currency with gold likely to return to the monetary system as a result.
Author: Julian D. W. Phillips
Posted: Wednesday , 28 Dec 2011
BENONI – Japan and China are to promote direct trading of yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said over the holiday weekend.
Japan will also apply to buy Chinese bonds next year, allowing the investment of Yuan that leaves China to Japan to remain in China, the Japanese government said. Encouraging direct yen-yuan settlement should reduce currency risks and trading costs.
China also announced a 70 billion yuan ($11 billion) currency swap agreement with Thailand last week as part of a plan outlined in October to promote the use of the yuan in the Association of Southeast Asia Nations and establish free trade zones. Central banks from Thailand to Nigeria plan to start buying yuan assets as the global Yuan market continues to be developed quickly.
Investing in Chinese debt has become easier for central banks as issuance of yuan-denominated bonds in Hong Kong more than tripled to 112 billion yuan ($18 billion) this year, and institutions were granted quotas to invest onshore. Japan will start to buy “a small amount” of China’s bonds, a Japanese government official said, on condition of anonymity because of the ministry’s policy, without elaborating. Yes, it is small, but the systems are now in place. Expansion of these is happening and has the potential to burgeon!
China is Japan’s biggest trading partner with $340 billion in two-way transactions last year. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as global, financial markets remain volatile and decaying. It marks a major leap forward of the internationalization of the Chinese currency, a step that has been developing for the last few years, from tiny beginnings. It signals that the Chinese banking system has developed to the stage where it can handle international transactions of note. The development of the banking system is clearly far advanced, so expect the enlargement of the international Yuan market to pause, as this leap in size settles in and any teething problems eliminated.
The next step after that is to go completely global!
First Step of Many: Chinese Trade Bloc the initial target not the deposing of the Dollar
It would be wrong to see these moves as purposely attacking the dollar. China’s motive is as simple as the world has seen new world power gain strength. We’re witnessing the post-initial steps of the growth of a Chinese empire, encompassing its Asian trading partners and bringing them into a new Asian Yuan currency bloc.
Initially, Chinese economic development has focused on internal growth spreading from the South and Eastern parts of China into the hinterland north and west of the country as the nation slowly but steadily lifts itself out of poverty.
Financially, China isolated its currency from global influence as its banking system was so underdeveloped. But with government pressure and the capabilities the Chinese people banking is now racing to catch up.
The Chinese government wants Chinese banking and trade to succeed and throws its full weight behind these developments. This has resulted in far quicker-than-anticipated entry into the global financial world. Careful to ensure that China benefits fully from these developments and not foreign businesses, China is sucking knowledge and wealth out of the developed world in its quest to fully develop its 1.3 billion people. It is naive on the part of the developed world -whether it is Europe or the US-to think that China will assist them with their debt and banking problems unless it ties directly into the development of China.
This is a financial war, involving, not lives but livelihoods, and China is winning every step of the way.
The financial world may belittle the present moves as still very small in money terms in a global context, but structurally the move should make the developed financial world jump to attention.
Developed World Losing Power and Heads into Deeper Crisis
The reason why the developed world has seen the debt and banking crisis wreak such havoc, so far, is that its growth has diminished to the point where it is having difficulty employing its young.
With such reduced cash flows, the size of debt burdens becomes overwhelming. When the developed world enjoyed strong growth, the present debt burdens were manageable. But not any more! The central banks of the developed world have had to create new money to fill the holes left by the dropping value of financial assets and try to hold such money printing at those levels or see inflation take off. There will, however, come a time when the developed world will have to pay more interest to raise loans as trust in its currencies diminishes. Should this happen, the debt mountain will be completely unsustainable, not only in Europe but in the United States as well.
Should interest rates rise -and the Fed will not let that happen by choice-because of falling foreign investment in the dollar, then Treasury and other Fixed interest markets in the developed world would be in danger of collapsing.
US DOLLAR AS THE SOLE, GLOBAL RESERVE CURRENCY TO END!
Of considerably more importance is the impact on global foreign exchanges and the role of the U.S. dollar as the world’s sole global reserve currency. For more than two years now we have been predicting that the day would come when Chinese exporters/importers would offer and bid prices for goods in the Chinese Yuan. Well it has arrived, albeit confined to Asian trade at the moment.
As of now, $350 billion in global trade will disappear, replaced by Yuan/Yen trade. Where will these dollars go? Over time they will be sold off and head home through a falling exchange rate. That’s why we’ll see the Yuan appreciate, but only initially, as the Chinese ensure that demand is met by foreign sales of Yuan for non-U.S. currencies.
As time passes the process of the internationalization of the Yuan will primarily be at the expense of the dollar. At some point in this process, the rise of the Yuan and the fall of the dollar from its throne will become visible on foreign exchanges and in the financial picture inside the U.S.A. and Europe. At best, we’ll see the Yuan join the world’s current leading currencies in global trade, but rising in the future to potentially the prime global, reserve currency at worst.
But this process could take more than five years or less if the Chinese government pushes it hard.
The consequential pressures on the global currency system, which presently is dependent on the U.S. dollar for its credibility, will undermine the entire global monetary system. When control of the monetary system was entirely in the hands of the developed world, both sides of the Atlantic, gold could be side-lined. But with this new Chinese empire, the new currency bloc has divergent interests from the developed world.
The developed world is seeing the beginning of its loss of control over gold!
Asia, as well as emerging nations worldwide, have seen the importance of gold in their reserves and continue to press for an increase in their holdings – almost preparing for the day when global cooperation is reduced by trade wars, protectionism and the like. The spectre of a world split into two financial and trading parts is now in front of us. While this is still in the future, it’s a visible probability. In such a financial climate, consistent with its history, gold being independent of national obligations and links must return to the system in one form or another.
Julian Phillips for the Gold Forecaster – www.goldforecaster.com and the Silver Forecaster – www.silverforecaster.com