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Yuan inclusion in SDR basket inevitable

An integrated Eurasian block will dominate the world. The Chinese are acting upon that insight.

The IMF is due to re-examine the composition of its currency basket for Special Drawing Rights, a foreign-exchange reserve asset for fund members, later this year says Zhao Yongsheng.

“Our assessment now is that the substantial real effective appreciation [of the yuan] over the past year has brought the exchange rate to a level that is no longer undervalued,” the IMF said last week after it concluded its 2015 Article IV Consultation Mission to China.

Does this mean that the yuan is about to be included in the SDR currency basket? We can consider a “signal” sent by IMF Managing Director Christine Lagarde during a speech at Fudan University in Shanghai in March: “It’s not a question of if, it’s a question of when.”

Her speech, and the IMF’s announcement, indicate that the yuan is quite likely to be included in the SDR basket when it is reviewed this year.

But merely joining the SDR basket is not the only important step for the yuan, even if it is already a significant development in the currency’s internationalization.

Actually, the inclusion of the yuan in the SDR basket is not just a question of “if” or “when,” but a question of “how much.”

Let’s look first at the composition of the SDR basket, which now includes the four strongest currencies in the world: the dollar, euro, yen and British pound.

When the SDR was launched in 1981, the shares for the five currencies in the basket were 42 percent, 19 percent, 13 percent, 13 percent and 13 percent for the dollar, Deutsche mark, French franc, yen and pound, respectively. The basket is adjusted every five years.

Looking at this original composition, we can divide the basket’s basic structure into two blocks: the “Deutsche mark-French franc block” (or the “euro block” after the adoption of the European single currency in 2001) and the “dollar-pound-yen block.”

This division is based on differences in culture, historical links and even military relationships.

It is true that Germany and France are not the same, as one is a Germanic culture and the other is a French or half-Latin culture.

Nevertheless, these countries had no choice but to work together to establish and expand the European Union. Especially since the birth of the euro, monetary and financial relations between Germany and France have become closer. They are both countries of Europe’s continental culture.

For their part, the UK and US share an “Anglo-Saxon” culture, and their relationship is that of siblings. With regard to Japan, it has close links to the US due to its post-WWII occupation and rebuilding by the US. That’s why we put these three countries and their currencies together.

Originally, the combined share of the mark and franc was 32 percent.

Even if we assume this European continental culture block increased to 37.4 percent for 2011-15, it would still lag far behind the dollar-pound-yen block, which stands at 62.6 percent for the same period.

How can we maintain balance in the SDR basket?

Balance is essential for any game with multiple players, and that is also true of currency baskets.

In the case of the above division, obviously the gap of 25.2 percentage points between two blocks is too huge to be good for stability.

If we assume a share of 10 percent for the yuan in the SDR basket, the euro plus the yuan will make up 47.4 percent of the basket, against a new share for the dollar-pound-yen block of 52.6 percent. Now, the gap is not so large.

Why do we put the euro and yuan together? This implies the necessity for Europe to find another force to implicitly provide balance against the “American hegemony.”

The increasing closeness of Europe and China will be gradually reinforced with the adoption of China’s “One Belt, One Road” initiative and the operation of the China-initiated Asian Infrastructure Investment Bank.

This solution can also be a moderate and acceptable reform for the current players in the SDR basket, whatever their position, because even with the new composition, the dollar-pound-yen block will retain a dominant position with 5.2 percentage points more than the euro-yuan block.

Finally, in China’s pursuit of inclusion, France will play a major role – and not only because the IMF’s president is usually a French national.

It is also because France needs China, probably much more than do other countries, to recover from the lingering effects of the financial crisis and keep its economy growing.

Source:Global Times

The author is a Paris-based economist and vice-president of the Paris-based China-France Association of Lawyers and Economists. bizopinion@globaltimes.com.cn

China’s yuan joins top five curriencies

China’s yuan has become one of the five most widely used currencies in global payments, an international financial transactions agency announced Wednesday.

The yuan passed the Canadian and Australian dollars in popularity in December, according to the Society for Worldwide Interbank Financial Telecommunication, which provides communications between financial institutions and companies. It said the yuan now ranks behind the dollar, the euro, the British pound and Japanese yen.

The change is an “important milestone,” and confirms the yuan’s transition from an emerging to a “business as usual” currency, said Wim Raymaekers, Swift’s head of banking markets, in a statement.

Beijing has signed agreements with a number of foreign financial centers including London to become hubs for clearing yuan transactions.

The yuan, also known as the renminbi, accounted for 2.17 percent of global payments in December, behind the yen’s share of 2.69, according to Swift. The U.S. dollar’s share is about 45 percent.

Global payments in yuan increased by 20.3 percent in December, outpacing overall payments growth of 14.9 percent, according to Swift.

Source: AP

China starts payments with Russia in national currencies

China will start swaps and forwards between the yuan and the national currencies of Russia, Malaysia and New Zealand on December 29, the China Foreign Exchange Trade System (CFETS) reported Friday.

Earlier in December, China’s Minister of Commerce Gao Hucheng claimed that China could increase the usage of yuan in trade with Russia amid the ruble’s depreciation, which falls in line with China’s intention to increase the usage of national currencies in international payments in order to weaken the US dollar’s dominance in global finance and promote the yuan as an alternative.

In October, the Russian Central Bank and the People’s Bank of China reached a three-year agreement on currency swaps worth 150 billion yuan (over $24 billion).

Both the Russian and the Chinese leaders have repeatedly praised the decision, saying it would bring positive effects for the countries’ economies and currencies.

The main benefits of mutual payments in national currencies are the absence of charges for the conversion of the currencies, direct payments and higher transparency in relations between the banks.

China ready to help Russia says foreign minister

Chinese Foreign Minister Wang Yi said Monday that China is ready to help Russia overcome its economic difficulties.

Beijing is willing to help Moscow and believes that Russia “has the ability and the wisdom to overcome the current economic difficulties,” the minister was quoted as saying by the South China Morning Post.

Wang did not outline any specific measures, according to the newspaper.

Last week, China’s Minister of Commerce Gao Hucheng stated that China could increase the use of yuan in trade with Russia amid falling ruble rates.

Russia has seen a rapid depreciation of its national currency in recent months due to falling oil prices and sanctions imposed by the West over Moscow’s alleged involvement in the Ukrainian crisis.

Frankfurt: First European direct settlements in Chinese yuan

European companies now have the opportunity to settle trading accounts in Chinese yuan. The Bank of China in Frankfurt has become the first to operate European yuan clearing. Trading costs will be cut as there will be no dollar exchange first.

More than 10 German regional and international banks including Deutsche Bank, Commerzbank, DZ Bank AG, and Landesbank Hessen-Thueringen Girozentrale, have opened accounts at Bank of China in Frankfurt.

In June the People’s Bank of China chose Bank of China Ltd. to clear payments in the eurozone. The last five months were spent building the settlement infrastructure before the official start of clearing Monday.

Yuan clearing in Frankfurt “will increase the share of German SMEs using the renminbi for their trade with China to well over the current 10 percent,” Frank-Oliver Wolf, divisional head of cash management and international business at Commerzbank told Bloomberg.

Frankfurt is the first European financial center to conduct transactions in yuan. Germany and China agreed to establish a settlement center for the yuan in March. The agreement was concluded by the Bundesbank and the People’s Bank of China during the state visit of Chinese leader Xi Jinping to Germany.

The yuan is “gaining traction as a trade currency and has in my opinion already reached the level of an investment currency,” Joachim Nagel, a board member at the Bundesbank, said Monday in a speech in Frankfurt. “It is only a matter of time before the renminbi [yuan-Ed] becomes an international reserve currency,” he added.

“It’s clear from our observations in the course of 2014 that the yuan is no longer an emerging market currency,” Sven Juergensen, head of forex sales for corporate clients at HSBC Holdings Plc in Germany, said in a Bloomberg interview on November 14. “Trades can be conducted at any point in time at adequate spreads.”

China has reduced control over the yuan exchange rate and is gradually moving towards making it a global trading currency. Other financial centers, including Hong Kong, Taipei, Singapore, Seoul, Paris and London, have also signed similar agreements with China.

Another step in this direction has already been made in China. The Hong Kong and Shanghai Stock Exchanges a have created a mechanism for cross-trading – Shanghai-Hong Kong Stock Connect.

It allows investors access to the largest stock market on China’s mainland and vice versa.

In recent years China has been promoting its currency. It has concluded swap agreements with a growing number of countries. In some countries China helps companies to issue yuan denominated bonds. Establishing a yuan clearing service in Europe is an essential to create a new reserve currency.

Russia, China abandoning dollar

Russia and China plan to use more actively rubles and yuan in mutual settlements, Russian President Vladimir Putin said at an Asia-Pacific Economic Co-operation summit in the Chinese capital on Monday.

“Within cooperation with that country (China) we plan to use national currencies more actively in settlements,” the Russian leader said, recalling that first deals are already paid in rubles and yuan.

Putin recalled that settlements in national currency are particularly planned in oil trade. “Our experts are studying such possibilities,” the Russian president said.

Payments in national currencies of such countries as China and Russia will allow influencing financial and energy markets, Russian President Vladimir Putin said at the APEC summit.

“Payments in national currencies between such partners as China and Russia — a very promising direction of our cooperation. It will allow broadening our possibilities in mutual trade and substantially influencing world financial and energy markets,” the president said.
On Sunday, Putin and Chinese counterpart Xi Jinping particularly discussed possible settlements in national currency.

The presidents of the two countries “focused on mutual settlements in yuan in different spheres, including such sensitive spheres as military-technical co-operation that will strengthen yuan as a reserve regional currency,” Russian presidential spokesman Dmitry Peskov said after the meeting of the two leaders.

De-dollarization: Europe and China start direct trading

China will started direct trading between the yuan and the euro today as the world’s second-largest economy seeks to spur global use of its currency.

The move will lower transaction costs and so make yuan and euros more attractive to conduct bilateral trade and investment, the People’s Bank of China said today in a statement on its website. HSBC Holdings Plc said separately it has received regulatory approval to be one of the first market makers when trading begins in China’s domestic market.

The euro will become the sixth major currency to be exchangeable directly for yuan in Shanghai, joining the U.S., Australian and New Zealand dollars, the British pound and the Japanese yen. The yuan ranked seventh for global payments in August and more than one-third of the world’s financial institutions have used it for transfers to China and Hong Kong, the Society for Worldwide International Financial Telecommunications said last week.

“It’s a fresh step forward in China’s yuan internationalization,” said Liu Dongliang, an analyst with China Merchants Bank Co. in Shenzhen. “However, the real impact on foreign exchange rates and companies may be limited as onshore trading volumes between yuan and non-dollars are still too small to gain real pricing power.”

Transactions exchanging yuan for dollars totaled 12.2 trillion yuan in the first half of 2014, dwarfing the 110.4 billion yuan worth of trades for euros and the 251.7 billion yuan for yen, the PBOC said in a monetary policy report last month.

Trading Ties

China’s trade with European Union nations grew 12 percent from a year earlier to $404 billion in the first eight months of 2014, according to data from the Asian nation’s customs department. That compares with just $354 billion with the U.S. during the period.

French and German companies lead among countries outside of greater China in the use of the yuan, according to a July report by HSBC that was based on a survey of 1,304 businesses in 11 major economies that have ties with mainland China. Some 26 percent of French corporates and 23 percent of German companies were using the currency to settle trade, the highest proportions apart from mainland China, Hong Kong and Taiwan.

Last One

China appointed yuan clearing banks this year in Frankfurt, Paris and Luxembourg, and Germany’s financial capital as well as Paris were awarded quotas under the Renminbi Qualified Foreign Institutional Investor program to invest the currency raised offshore in China’s domestic capital markets.

“Given the appointments of renminbi clearing banks in Frankfurt and Paris, today’s announcement is largely expected,” Australia & New Zealand Banking Group Ltd.’s economists led by Liu Li-gang wrote in a research note today. The agreement marks a “significant milestone” in yuan internationalization as the euro is the only G3 currency that has not had direct conversion with the yuan, Liu said.

The European Central Bank is able to draw on a maximum 350 billion yuan ($57 billion) swap line from the People’s Bank of China under the terms of an agreement signed in October 2013. The PBOC can access 45 billion euros ($57 billion) under the terms of the currency swap.

Source: Bloomberg

China, Argentina agree on currency swap

Argentina, which defaulted on its debt in July, will receive the first tranche of a multi-billion dollar currency swap operation with China’s central bank before the end of this year, the South American country’s La Nacion newspaper reported on Sunday.

The swap will allow Argentina to bolster its foreign reserves or pay for Chinese imports with the yuan currency at a time weak export revenues and an ailing currency have put the Latin American nation’s foreign reserves under intense pressure.

La Nacion said Argentina would receive yuan worth $1 billion by the end of 2014, the first payment of a loan worth a total $11 billion signed by Argentina’s President Cristina Fernandez and her Chinese counterpart in July.

The daily newspaper said the presidents of the countries’ two central banks had met on the sidelines of a meeting in Switzerland, but did not say how it had obtained the information.

Fernandez’s government has imposed stringent import and capital controls to safeguard the dwindling reserves, now at around eight-year lows, which it needs to pay its debts.

Source: Reuters

Central banks’ investment in yuan puts currency near reserve status

Investment by dozens of central banks comes despite currency not being fully convertible

At least 40 central banks have invested in the yuan and several others are preparing to do so, putting the mainland currency on the path to reserve status even before full convertibility, Standard Chartered said.

Twenty-three countries have publicly declared their holdings in yuan, in either the onshore or offshore markets, yet the real number of participating central banks could be far more than that, said Jukka Pihlman, Standard Chartered’s Singapore-based global head of central banks and sovereign wealth funds.

Pihlman, who formerly worked at the International Monetary Fund advising central banks on asset-management issues, said at least 17 central banks had invested in yuan assets without declaring they had done so.

The US dollar is still the world’s most widely held reserve currency, accounting for nearly 61 per cent of global allocated reserves at the end of last year, according to IMF data. The ratio has been on a declining trend since 2001, when 71 per cent of the world’s reserves were denominated in US dollars.

The IMF does not disclose the percentage of reserves held in yuan, but the emerging market countries’ share of reserves in “other currencies” has increased by almost 400 per cent since 2003, while that of developed nations grew 200 per cent, according to IMF data.

Pihlman said “a great number of central banks are in the process of adding [yuan] to their portfolios”.

“The [yuan] has effectively already become a de facto reserve currency because so many central banks have already invested in it,” he said. “The [yuan] may become a de facto reserve currency before it is fully convertible.”

The central banks more likely to add yuan holdings in the future were the ones with “strong trade linkages to China” and those which had relatively large levels of reserves which could consider diversifying more for return-related reasons, he said.

“The [yuan’s] convertibility may be already there for central banks in a way that has got them comfortable to start investing in the currency,” Pihlman said.

The rising popularity of the yuan among central bankers is probably mainly due to Beijing’s extremely favourable treatment of them as it has sought to encourage investment in the yuan.

For example, central banks enjoy preferential treatment in the qualified foreign institutional investor category, both on the size of the quota and the length of the lock-up period. The quotas to the interbank bond markets given to central banks are not publicly known, but some of those announced by investing central banks are up to 10 times larger than others in the programme and, most importantly, free of any capital controls.

“Central banks and sovereign funds have special treatment,” Pihlman said. “They have the ability to invest in a way that any other investor does not. When it comes to convertibility, there is nothing kind of formally out there, but the feed back from central banks is that it is fully convertible.”

Among the 23 central banks known to have yuan holdings, 11 are from Asian markets with close trade links with mainland China: Australia, Hong Kong, Indonesia, Japan, South Korea, Macau, Malaysia, Nepal, Pakistan, Singapore and Thailand, according to public records from either central banks’ own statements or central bankers’ interviews with the press.

The rest are five from Europe – Austria, Belarus, Norway, France and Lithuania – and seven from South America or Africa – Bolivia, Chile, Ghana, Kenya, Nigeria, South Africa and Tanzania.

Source: South China Morning Post

Yuan clearing banks in Luxembourg, Paris

In its continued push to make the yuan a global currency, China’s central bank said Sunday it plans to designate clearing banks for its currency in Paris and Luxembourg, as the two financial centers battle with London to become the leading European offshore yuan-trading city.

The People’s Bank of China announced the move in two separate statements Sunday. It didn’t say when it would designate the clearing banks.

The French and Luxembourg central banks said Sunday they had signed agreements with PBOC allowing for greater cooperation in the oversight of their domestic yuan market.

The weekend moves are the latest salvos in the race to win a major share of business in cross-border transactions in the Chinese currency. Singapore and Sydney are also vying for a significant share of the global yuan market, which is expected to expand rapidly along with China’s fast-growing economy.

On June 18, the PBOC appointed China Construction Bank Co., one of the country’s top-four state-owned banks, to clear yuan-related transactions in London. It became the first yuan clearing bank in a European country.

Opening a clearing bank is a critical step in developing an offshore yuan-based business. The designated banks will be able to supply yuan liquidity in case of a shortage by directly accessing China’s onshore currency market.

The Chinese central bank said that setting up the clearing banks will benefit Chinese, French and Luxembourg ” businesses and financial institutions in using the renminbi [yuan] for cross-border transactions and in further promoting trade and investment.”

French authorities have openly pushed for Paris to become a center for yuan transactions.

In March, China also granted 80 billion yuan ($12.9 billion) of quotas to French financial institutions that enable direct investment in the Chinese domestic financial market.

The Bank of France said Sunday the latest decisions by the PBOC “confirm the prominent role of the French market place” in cross-border use of the currency.

Luxembourg, home to a powerful asset-management industry, has built strong ties with Chinese investors in recent years and currently hosts the European headquarters of China’s three leading banks.

Last year, former Luxembourg Finance Minister Luc Frieden cited figures showing that the country was the leading center for yuan business in the euro zone, with some 40 billion yuan in deposits, 62 billion yuan in loans from Luxembourg banks and 220 billion yuan under management in the fund industry.

For China, the move to allow the yuan to be used more freely abroad aims to boost demand for the currency and reduce the amount of dollars entering the country. China still maintains a tight grip on the yuan’s value, with its trading strictly controlled in the mainland market.

Source: Nasdaq

Kenya to host first yuan clearing house in Africa

Kenya wants to host a clearing house for China’s yuan currency – a bold African first that would deepen the continent’s ties with Beijing, already a big investor from The Cape to Cairo.

Such a venture would not eclipse the dollar in Africa anytime soon, however, because the yuan is tightly managed and traders are wedded to the greenback’s flexibility.

Africans can already get quotes for their currencies against the yuan . A clearing house would cut the need for dollar settlements, speed things up and reduce costs.

But the real prize for Kenya, or any other African host, would be the symbolism of being the continent’s business gateway with Asia’s economic emperor, even if business starts modestly.

Such an exchange would also be the first outside Asia.

Its prospect is a measure of China’s challenge to Africa’s traditional partners in Europe and the United States and reflects the increasing attractions of a continent with some of the world’s fastest growing economies.

“Even if the benefits to business have probably been slightly overblown by diplomats on both sides, I don’t think you can understate the symbolic aspect,” said Shilan Khan, Africa economist at London-based Capital Economics.

China’s ties with Africa have expanded fast.

In 2012, the total volume of China-Africa trade reached $198.49 billion, a rise of 19 percent over the previous year, Chinese government figures show. China accounted for 18.1 percent of Africa’s total trade volume in 2012, up from 3.8 percent in 2000.

“The proposal is basically to consider Kenya favourably given that the financial market is deep here,” Kenyan Finance Minister Henry Rotich told Reuters in August, citing rivals such as Nigeria, which already holds some reserves in yuan.

South Africa had a financial centre that dwarfs Kenya’s and has been mooted as a potential host, though officials there have not said they are pursuing such a plan.

“We are sort of competing and at the end of the day, the Chinese government is the one to decide where this clearing house will be,” Rotich said, making his pitch for east Africa’s biggest economy which aims to become a financial hub.

Early signals look good for Kenya.

“We are very positive about this clearing house and I think it is very important for Kenya to set up a financial hub here and to process the Chinese currency renminbi,” China’s ambassador to Kenya, Liu Guangyuan, told Reuters on the sidelines of a conference in Nairobi on Wednesday.

The value of potential business through such a clearing house was still a subject of discussion, he said.

Kenya’s daily turnover of foreign exchange is $330 million to $370 million, sometimes rising to $500 million.

Highlighting Nairobi’s enthusiasm for a clearing house based in Kenya’s central bank, President Uhuru Kenyatta made his bid for Beijing’s backing during a visit to China in August.

Business between Kenya and China is growing, even if Europe is still a bigger trade partner. Kenya’s Equity Bank, for example, has opened a branch in Nairobi for Chinese business executives, complete with Chinese tellers serving them.

“Everyone is trying to clinch a deal to directly clear and settle yuan transaction with the People’s Bank of China,” said an official at a Chinese state think-tank that often advises Beijing on policy, speaking about Africa’s clearing house plans.

In the meantime government officials in Niger have reportedly found evidence of bloated costs in oil deals with China National Petroleum Corporation (CNPC), leading the government to seek renegotiations on sections of

its contracts with CNPC. In Chad, CNPC operations have been suspended due to alleged “gross environmental negligence”, reports The New York Times.

Gabon, in another controversial move, will also be reclaiming Sinopec assets in 2015, because of breaches of contract, according to Macau- Daily Times

In August Chad’s oil minister Djerassem Le Bemadjiel told state radio that the Chadian government had “found flagrant violations of environmental standards by […] CNPC.

Not only do they not have facilities to clean spilled crude, there were also intentional spillages in order

reduce costs”, reported Reuters.

Bundesbank: China’s currency fast becoming global reserve currency

Following the most recent shift ‘away’ from a USD-centric world (with the China-Australia direct currency convertibility), it seems the possibility of China’s Yuan as the next global reserve currency is getting closer. The Brits, Germans, and now the Swiss (who just signed a free-trade-agreement with China) are all actively vying to become Europe’s Yuan trading hub as it seems the long line of developments to internationalize the currency over the past two years. As Bundesbank board member Joachim Nagel noted in a speech entitled “Reniminbi as a potential reserve currency” this week, “the Chinese currency is well on its way to becoming one of the future global reserve currencies.” He noted that, although the USD is still the most commonly-used currency for settling trade with China; from virtually zero in 2010, the Yuan is used to settle over 12% of trading transactions now – and is likley to increase further.

Remember, nothing lasts forever:

This latest development in global currency relations should come as no surprise to those who have followed our series on China’s slow but certain internationalization of its currency over the past two years. To wit: “World’s Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade“, “China, Russia Drop Dollar In Bilateral Trade“, “China And Iran To Bypass Dollar, Plan Oil Barter System“, “India and Japan sign new $15bn currency swap agreement“, “Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says“, “India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees“, “The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap“, and “Thanks, World Reserve Currency, But No Thanks: Australia And China To Enable Direct Currency Convertibility.”

Via Deutsche Bundebank (Dr. Joachim Nagel),

Renminbi as a potential reserve currency

According to Bundesbank Executive Board member Joachim Nagel, the Chinese currency is well on its way to becoming one of the future global reserve currencies. This potential stems from the renminbi’s increasing convertibility, he said at a conference of the Chamber of Industry and Commerce in Frankfurt.

He emphasised that although the US dollar is currently the most commonly used currency for settling trade with China, the significance of the renminbi has increased greatly over the last few years. He underlined this by referring to figures published by SWIFT, which indicate that the percentage of trading transactions settled in renminbi jumped from virtually zero to around 12% between 2010 and 2012 – and is likely to increase further. In view of this, he pointed out that the renminbi has already achieved the status of a trading currency.

Drawing parallels to the Deutsche Mark

Mr Nagel compared China’s growing importance with the German economic miracle of the 1950s and drew parallels between the renminbi’s current growth and the development of the Deutsche Mark. Thanks to the recovery of the German economy, the country accumulated a large volume of foreign exchange reserves and the Deutsche Mark acquired the status of a global investment and reserve currency, he explained. He anticipates that “the renminbi is certain to have similar long-term prospects if market access is liberalised further”. Mr Nagel backed up his comments by citing a survey of reserve managers carried out by RBS. The survey revealed that 14% of reserve managers have already invested in renminbi, with 37% of respondents considering investing in the currency in the next five to ten years.

Mr Nagel sees the renminbi as currently transitioning from a being trading currency to an investment currency. While both inward and outward direct investment is now possible, portfolio investments will continue to be regulated, he remarked, adding that improvements are expected in this area. “The internationalisation process of the Chinese currency is taking place more gradually than was the case with the Deutsche Mark, which, at times, was subject to radical upheaval”, he added. Mr Nagel recalled, in this context, the collapse of the Bretton Woods system of fixed exchange rates and the crisis in the European Monetary System at the beginning of the 1990s.

Renminbi financial centre in Frankfurt

Mr Nagel noted that “given China’s growing economic importance, the internationalisation of the renminbi seems long overdue”. He explained the Chinese government’s decision to employ offshore trading centres, which would allow China to establish its currency internationally, while protecting its domestic financial system. Hong Kong, where around 80% of all renminbi trade is settled, is by far the most important trading centre for the currency, with London and Singapore each accounting for 4% of renminbi trade since mid-2012. He added that the expansion of the market has led to the growing significance of other financial centres for renminbi.

Mr Nagel welcomed Frankfurt’s endeavour to position itself as a trading hub for the Chinese currency, calling it a step in the right direction, towards the free movement of capital. “The high level of interaction between China’s and Germany’s real economies highlights the necessity for a more active renminbi trade”, Mr Nagel remarked, “perhaps even using Germany as a hub” – Zero Hedge

Rise of a New Currency Order

For years now, the collapse of the dollar has been in the cards. Recent developments show mounting pressure on the dollar’s reserve currency status. With a major international deflation going on, the threat of inflation through money printing is unreal. However, should the dollar’s reserve currency status end, the repatriation of trillions of petro- and eurodollars could lead to a strongly inflationary scenario.

The roles of a reserve currency are to finance international trade and to function as a store of value for Governments. Until the second world war it used to be the British pound, but with the demise of the British Empire, the pound lost its international relevance and was overtaken by the dollar. This was formalized in the 1944 Bretton Woods system. All other currencies were fiat currencies, but pegged to the dollar, which in turn was pegged to Gold at 40 dollars an ounce and redeemable for international trading partners.

The Eurodollar
With the dollar as the reserve currency, the US had to export dollars. In the early years after the war especially for Europe, the famous Eurodollars. This sounds great: print money and buy whatever you like. But with the Gold window it was also risky: overprinting could mean excess dollars would be exchanged back to Gold, depleting US Gold reserves.

This was also a weakness that those annoyed with American Hegemony could exploit. In 1967 the leftist press mogul Jean-Jacques Servan-Schreiber penned a famous screed called ‘le défi Américain’ (the American challenge’), arguing Europe was being colonized economically by superior American competition.

France, at the time, was run by de Gaulle, who never was impressed with Anglo-American supremacy. He made a point of exchanging every dollar he could lay his hands on as a means to undermine it.

In the late sixties the situation got badly out of hand because of the Great Society and the Vietnam war, very costly projects that were deficit financed, leading to serious inflationary pressures. Inflation that the US tried to export, leading to an excess of dollars abroad. Especially the resurging Deutschmark’s appreciation became untenable. The Europeans started pressuring the US to fix its deficits, provoking the US Treasury Secretary John Connally famous cry ‘the dollar is our currency and your problem’.

But the situation had become unsustainable and Nixon was forced to close the Gold window to stop the depletion of US gold. This was the end of the Bretton Woods system and from then on the major currencies were floated freely in the international currency markets.

The Petrodollar
But it did not end the dollar reserve currency status, as the Empire had been found another basis for it: they reached an agreement with the House of Saud, to accept only dollars for its oil. The Sauds agreed to invest their dollar wealth on Wall Street, making the deal even more powerful for the Empire. Saudi Arabia controlled OPEC and the dollar was saved: international oil trading is financed with dollar only. Since then we have been on an informal Black Gold standard, known as the petrodollar.

This situation was better than before, because overprinting of the dollar for international trade or to finance all sorts Empire projects could no longer be punished by depleting Gold reserves and would result only in rising prices.

In the last decade the problem of over printing was solved by artificially raising oil prices through the Peak Oil hoax, and ending Iraqi oil production. It must be understood that the Empire is not looking for more oil production. There is so much oil in the world that should it be drilled for freely, it would end the Money Power’s energy monopoly. The Iraq invasion and the quest for control of the Middle-East is to keep a lid on oil production. Saddam’s suicidal decision to accept euro for his oil only hastened his demise.

Even today Iraqi oil production is not even half of what it was before 1991. With the Western Oil companies now in charge, it will most likely never fully recover. By raising the price for oil, the oil market has mopped up excess dollar supplies, which are now needed for the oil trade. As a result, the dollar has remained relatively stable in its value. Of course, it fits well with the agenda of decapitating the middle classes and under this agreement higher oil prices also means ever more oil profits invested in Wall Street.

Of course, the great boon of this for the Empire is that it can pay with worthless paper for real goods. It can eternally finance a major trade deficit.

Trade deficits are incorrectly understood as problematic.
From a nation’s point of view, the goal of trade is not to export, but to import. We export to give back for what we need from others. If you run the reserve currency, you don’t need to export as much as you import, because you can partially finance your imports with money printing. For all other nations this is impossible and trade deficits are lethal in the long run, as it leads to net capital outflow.

But the US Empire is in trouble. Its infrastructure is crumbling, its manufacturing base gone, it’s badly over extended. It needs ever more virulent threats to coerce the nations into dollar submission and just like Connally failed in 1971, the US is failing today. The Money Power is done with the Empire and the dollar and it is moving to the next phase. The dollar will have to step back and we are seeing a realignment.

The new currency order
China is moving towards a Gold backed yuan that will be very powerful in the international arena. Recently Australia, which is already completely dependent on China, with 30% of its exports going there, is preparing direct convertibility between the yuan and the Australian dollar, meaning they will no longer use US dollar to finance bilateral trade. This means less US dollars are needed in its reserve currency role.

In 2001 Goldman Sachs executive Jim O’Neill invented the BRIC’s. South Africa was later added, representing Africa and emphasizing its globalist agenda. Russia and China, as two powerful neighbors, obviously have long standing and important bilateral relations. But equally obviously, have little in common with Brazil, India and South Africa. India and China are actually sworn enemies. However, in 2009 they organized a first summit. Just a week ago we all of the sudden hear the BRICS are planning to open up a competitor to the IMF. They’re still working out the details and it’s not a done deal yet, but the move looks very serious.

And there is of course the euro, which, make no mistake, is in great shape. True, Eurocrat legitimacy is suffering because of the euro crisis, even in Germany the currency is losing support. But the euro crisis is purely for internal consumption, to sucker the nations into surrendering budget responsibility to Brussels. This is the final frontier for a full blown EU federalist Super State. While the euro is deeply hated, this is not really a problem for the Money Power: it isn’t in this business to make friends and it does not mind a big fight. It only fears real alternatives and these are nowhere to be seen. There is nobody proposing anything real, people are just letting off steam. Once they get their fiscal union, the crisis will quickly end. People have a short memory.

The euro was designed to be eventually backed by Gold and the ECB has enough of the stuff to be ready for the coming transition.

Conclusion
We are seeing the advent of the new currency order. There will be a number of more or less equal blocks: a dollar zone, a Yuan/BRICS zone and the euro, with the Yen and the Pound as lesser entities. These will later be able to converge to even more ‘cooperation’, in the Money Power’s relentless march towards World Currency.

These units will be at least partially Gold backed, implying long term deflationary pressures. Central Banks are buying Gold in major quantities, creating the interesting question why Gold prices have not risen in the last 18 months.

The problem for the United States will be to manage the transition. Trillions of dollars that will no longer be needed will have to be repatriated and this will lead to very strong inflationary pressures at home. It is unclear how the Fed is going to deal with that. It probably can’t. Furthermore, the US is probably in the worst of positions to deal with a new Gold standard. They claim to have 8,000 tonnes of Gold in Fort Knox, but nobody really believes that.

The hyperinflation scare that the Austrians have been promoting because of ‘money printing’ is ridiculous: we are in a stagflationary depression and prices are rising because of speculation, not because of excess money. But when the dollar loses its current status, long term price rises will become the norm.

The Greatest Depression has only just started.

Anthony Migchels

Australia, China to enable direct currency convertibility

A month ago we pointed out that as a result of Australia’s unprecedented reliance on China as a target export market, accounting for nearly 30% of all Australian exports (with the flipside being just as true, as Australia now is the fifth-biggest source of Chinese imports), the two countries may as well be joined at the hip.

Over the weekend, Australia appears to have come to the same conclusion, with the Australian reporting that the land down under is set to say goodbye to the world’s “reserve currency” in its trade dealings with the world’s biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process “slashing costs for thousands of business” and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar’s reserve currency status until one day it no longer is.

That said, this latest development in global currency relations should come as no surprise to those who have followed our series on China’s slow but certain internationalization of its currency over the past two years. To wit: “World’s Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade”, “China, Russia Drop Dollar In Bilateral Trade”, “China And Iran To Bypass Dollar, Plan Oil Barter System”, “India and Japan sign new $15bn currency swap agreement”, “Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says”, “India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees”, and “The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap.”

And while previously the focus was on Chinese currency swap arrangements, the uniqueness of this weekend’s news is that it promotes outright convertibility of the Yuan: something China has long said would happen but many were skeptical it ever would. That is no longer the case, and with Australia setting the precedent, expect many more Asian countries (at first) to follow in Australia’s footsteps, because while the developed world is far more engaged in diluting its currency as a means to spur “growth”, Asian and developing world nations are still engage in real, actual trade, where China is rapidly and aggressively becoming the world’s hub.