Tag Archives: Yuan

The biggest of big pictures, by Alasdair Macleod

Here’s a pretty good overview of what’s going on in the world. From Alasdair Macleod at goldmoney.com:

I have had a request from Mrs Macleod to write down in simple terms what on earth is going on in the world, and why is it that I think gold is so important in this context. She-who-must-be-obeyed does not fully share my interest in the subject. An explanation of the big picture is also likely to be useful to many of my readers and their spouses, who do not share an enduring interest in geopolitics either.

That is the purpose of this article. It can be bewildering when a casual observer tries to follow global events, something made more difficult by editorial policies at news outlets, and the commentary from most analysts, who are, frankly, ill-informed. Accordingly, this article addresses the topic that dominates our future. The most important players in the great game of geopolitics are America and China. But before launching into an update, I shall lay down the disciplines required for an informed analysis.

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The Distortions of Doom Part 2: The Fatal Flaws of Reserve Currencies, by Charles Hugh Smith

Why reserve currencies come and go. From Charles Hugh Smith at oftwomind.com:

Part 1

The way forward is to replace the entire system of reserve currencies with a transparent free-for-all of all kinds of currencies.
Over the years, I’ve endeavored to illuminate the arcane dynamics of global currencies by discussing Triffin’s Paradox, which explains the conflicting dual roles of national currencies that also act as global reserve currencies, i.e. currencies that other nations use for global payments, loans and foreign exchange reserves.
The four currencies that are considered global are the US dollar (USD), the euro, the Japanese yen and China’s RMB (yuan). The percentage of use in each of the three categories of demand for the reserve currencies–payments, loans and foreign exchange reserves–are displayed below.
Many observers don’t seem to grasp that demand for reserve currencies extend beyond payments. Many of those heralding the demise of the USD as a reserve currency note the rise of alternative payment platforms as evidence of the USD’s impending collapse.
But it’s not so simple. Currencies are also in demand because loans were denominated in that currency, so interest and principal payments must also be paid in that currency. There is also demand for the currency to be held as foreign exchange reserves–the equivalent of cash to settle trade imbalances and back the domestic currency.
Notice the minor role played by the yen and yuan, despite the size of the economies of Japan and China. There’s a reason for this that’s at the core of Triffin’s Paradox: any nation seeking to issue a reserve currency must export its currency in size by running large, permanent trade deficits (or an equivalent mechanism for exporting currency in size).
The reason why the yen and yuan are minor players is neither nation runs much of a trade deficit, and neither exports its currency in size via loans or other currency emittance mechanisms.
Triffin’s Paradox is the tension between a currency’s domestic role and its global role. The nation’s issuing central bank prioritizes domestic concerns–bolstering employment, tamping down (or generating) inflation, supporting the private banking system, etc.–but the rate of interest, etc. set by the issuing central bank has enormous impacts on nations using the currency for payments, loans and reserves.
No currency can serve two masters at the same time. If the issuing central bank raises interest rates for domestic reasons, the increase in rates may be ruinous to offshore borrowers who must convert weakening home currencies into the strengthening reserve currency to make interest payments.
Higher yields strengthen reserve currencies and weaken emerging market currencies. This increases the costs of servicing loans denominated in reserve currencies.
The question for any wannabe reserve currency is: how do you export enough currency into the global system to support the demand for payments, loans and reserves? If the issuing nation runs a trade surplus or modest deficit, trade doesn’t export enough currency into the global financial system to meet the demands placed on a reserve currency.
The alternative mechanism is debt. If the issuing central bank issues lines of credit to banks, then institutions can make loans denominated in the reserve currency to offshore borrowers.
The EU banks have issued loans in euros, and the fatal consequence of this is now becoming clear. Emerging market borrowers will be forced to default as their currencies weaken against the euro and the USD, driving the costs of servicing their debt denominated in euros and USD higher.
Loans denominated in USD and euros will bring the periphery crisis home to the core’s banking sectors as these loans default. It was all fun and games when the USD was weakening thanks to the Fed’a ZIRP (zero interest rate policy), because it became progressively cheaper to service loans in USD as USD weakened and emerging market currencies strengthened.
Now that dynamic has reversed: every click higher in U.S. yields vis a vis other currencies will only push the USD higher.
The system of reserve currencies is dysfunctional for everyone, creating and incentivizing fatal imbalances in trade, yields and debt. Some look to a basket of currencies (SDRs) as the solution, but all this does is tighten the coherence of a system that’s already dangerously hyper-coherent, i.e. highly susceptible to contagion.
There is no perfect reserve currency. Even gold has its limitations. As a result, the best available solution is a world of multiple currencies, some of which are not borrowed into existence, i.e. gold and bitcoin. Given a transparent range of options, nations, borrowers and lenders could choose whatever mix of currencies best suited them.
Some years ago I proposed using bitcoin as a reserve currency: Could Bitcoin (or equivalent) Become a Global Reserve Currency? (November 7, 2013)
The way forward isn’t to replace the USD with another dysfunctional reserve currency– the way forward is to replace the entire system of reserve currencies with a transparent free-for-all of all kinds of currencies.

China Is Now Left With Just Three Options, And They Are All Equally Bad, by Tyler Durden

China has only a few things it can do about the trade war with the US, and none of them are without offsetting costs. From Tyler Durden at zerohedge.com:

Last Friday’s forceful intervention by the PBOC, in which the central bank hiked the reserve requirement for FX forwards trading from 0% to 20%, was a warning shot at the gathering yuan shorts who managed to briefly send the Chinese currency below 6.90 against the dollar last week, after losing 4% of its value in the past month, and bringing the cumulative decline against the dollar to 10% since April, a far steeper drop than seen during the 2015 devaluation.

The yuan slide had come amid growing speculation that Chinese authorities are more willing to let their currency weaken along with market forces and an escalating trade war, at least for as long as they felt any capital account leakages are contained and manageable.

And yet, despite China’s long overdue intervention – after all, once capital flight begins as new holes in the capital account are uncovered, it would be too late to prevent a repeat of the 2015 scenario – the debate about Chinese currency depreciation and what happens next with Chinese policy gathered pace, with ING last week proposing that this latest attempt to “nuke the shorts” is doomed to failure, just like previous unilateral FX interventions.

Over the weekend, JPMorgan echoed ING’s skepticism, writing that despite Friday’s PBoC announcement and despite the cumulative depreciation over the past two months, “the pressure on the Chinese renminbi to decline further against the dollar is unlikely to go away if trade tensions with the US escalate further from here.”

Meanwhile, in a move that puzzled many China watchers, at the same time that the PBoC announced an increase in the reserve requirement ratio for fx forwards trading, China announced that it would implement tariffs on $60bn of imports in response to a threat by the US earlier this week to raise the tariff rate from 10% to 25% on $200bn of Chinese exports to the US, prompting some to speculate that the FX intervention was merely implemented to prevent a collapse in the yuan beyond 7.00 vs the dollar as the market freaked out about the latest Chinese retaliation.

To continue reading: China Is Now Left With Just Three Options, And They Are All Equally Bad

China Can Hold Trump’s Trade War Hostage, by Tom Luongo

China may be able to defeat Trump’s trade tactics by devaluing its currency, the yuan. From Tom Luongo at strategic-culture.org:

Calling Donald Trump a bull in a china shop would be a kindness. His approach to foreign affairs has been at times a refreshing stick in the eye to the global post-WWII institutional order. But, in recent months it has morphed into something more dangerous.

And his desire to solve the Gordian Knots of certain geopolitical problems, namely North Korea and Iran, have him lashing out in every direction possible, bullying the entire world into a Manichean corner. You are either against Iran or you will be removed from the global economy.

And that type of “diplomacy” plays well to an American electorate who feel, rightly or wrongly, that they have been abused by this system; that China’s rise has made us poor, that the EU, Mexico and Canada are taking advantage of us, that Russia is still the imperialist empire seeking to subvert our hard-working, decent American spirit.

That Iran is the definition of evil in the world and we are its savior.

It’s a good story, too bad it’s not true.

So, Trump has embarked on an epic, “Art of the Deal” style trade war that Russian President Vladimir Putin said recently at the St. Petersburg International Economic Forum (SPIEF), “…may lead to a systemic crisis, which the world has not seen yet.”

Putin is no dummy, nor is he an alarmist. When he speaks in these terms he is doing so having reached the limit of his patience. And when Putin speaks on these issues he’s also speaking for China.

Which brings me back around to the title of this article and why I feel China is the key to bleeding off the negative consequences to global trade, thus blunting Trump’s economic Sword of Damocles – tariffs, sanctions, fines and, ultimately, expulsion from the SWIFT international payment system.

The tool is Yuan devaluation and it is supported by China’s moves in the commodity futures markets. But, let’s start with the basic problem, debt.

The Debt Bomb

Trump, like every other aggressive U.S. president, is using the U.S. dollar’s primacy in global trade as a truncheon to bash any country that defies its edicts for global order. After a decade of zero-bound interest rates there are trillions in dollar-denominated debt out there issued by foreign companies.

To continue reading: China Can Hold Trump’s Trade War Hostage

In Unprecedented Move, China Plans To Pay For Oil Imports With Yuan Instead Of Dollars, by Tyler Durden

The dollar and the oil trade have been inseperable since the 1970s. No more. From Tyler Durden at zerohedge.com:

Just days after Beijing officially launched  Yuan-denominated crude oil futures (with a bang, as shown in the chart below, surpassing Brent trading volume) which are expected to quickly become the third global price benchmark along Brent and WTI, China took the next major step in the challenging the Dollar’s supremacy as global reserve currency (and internationalizing the Yuan) when on Thursday Reuters reported that China took the first steps to paying for crude oil imports in its own currency instead of the US Dollars.

A pilot program for yuan payment could be launched as soon as the second half of the year and regulators have already asked some financial institutions to “prepare for pricing crude imports in the yuan“, Reuters sourcesreveal.

According to the proposed plan, Beijing would start with purchases from Russia and Angola, two nations which, like China, are keen to break the dollar’s global dominance. They are also two of the top suppliers of crude oil to China, along with Saudi Arabia.

A change in the default crude oil transactional currency – which for decades has been the “Petrodollar”, blessing the US with global reserve currency status – would have monumental consequences for capital allocations and trade flows, not to mention geopolitics: as Reuters notes, a shift in just a small part of global oil trade into the yuan is potentially huge. “Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year.” Currently, virtually all global crude oil trading is in dollars, barring an estimated 1 per cent in other currencies. This is the basis of US dominance in the world economy.

To continue reading: In Unprecedented Move, China Plans To Pay For Oil Imports With Yuan Instead Of Dollars

China’s rise, America’s fall, by Golem XIV

Will a Chinese-led move away from the petrodollar also mean a change in the relative positions of US and China? From Golem XIV at golemxiv.co.uk:

Will the rise of China mean the fall of America?  In a word, yes. Although decline might be more accurate.

Why do I think this?  Because China is about to launch the PetroYuan and when it does the demand for dollars and for dollar denominated debt will shrink. When it does, I question whether the world will be so sanguine about the level of debt that America carries. If that happens then the value of the dollar is in question.

At the moment no matter what level of debt America carries, other countries need dollars. Dollars to pay for oil, since oil is traded in dollars.  Dollars for their financial system so their banks can settle contracts for goods and services traded in dollars.

But over the last few years China has been systematically putting in place everything it needs to launch the Yuan as not only a rival to the dollar in trading and settling oil contracts but as a rival to the dollar as the world’s reserve currency.  At the moment the only rival to the dollar is the Euro. I think it fair to say the relationship between the two currencies and their issuing powers, has been… ‘delicate’.  The news that Sadam Hussein was going to start trading his oil in Euros came just a few months before America and its lap dog GB, decided Sadam was a threat to world peace and went to war with him.  Something similar happened to Colonel Qaddafi.

Under Qaddafi Libya’s currency was backed by the country’s large holdings of gold and silver. This had allowed Qaddafi to finance, for example, the entire construction of the Great Man Made River without going to Western banks for a single loan. Libya was debt free and owned its own resources and infrastructure. Obviously a very unsatisfactory state of affairs for any third world country to get ideas so far above their station.  Worse, he had a very public plan which he had laid before the Pan African Congress, to create a pan African currency backed by gold and silver to be launched by 2023. It was not too long before Hilary Clinton arrived in a freshly bombed Libya and crowed to CBS, “We came, we saw, he died.” Charming woman. I was only surprised she didn’t say “Mission accomplished.”

To continue reading: China’s rise, America’s fall

 

Cracks in Dollar Are Getting Larger, by Jim Rickards

Slowly but surely, the world is moving away from the dollar as the reserve currency. From Jim Rickards at dailyreckoning.com:

Many Daily Reckoning readers are familiar with the original petrodollar deal the U.S made with Saudi Arabia.

It was set up by Henry Kissinger and Saudi princes in 1974 to prop up the U.S. dollar. At the time, confidence in the dollar was on shaky ground because President Nixon had ended gold convertibility of dollars in 1971.

Saudi Arabia was receiving dollars for their oil shipments, but they could no longer convert the dollars to gold at a guaranteed price directly with the U.S. Treasury. The Saudis were secretly dumping dollars and buying gold on the London market. This was putting pressure on the bullion banks receiving the dollar.

Confidence in the dollar began to crack. Henry Kissinger and Treasury Secretary William Simon worked out a plan. If the Saudis would price oil in dollars, U.S. banks would hold the dollar deposits for the Saudis.

These dollars would be “recycled” to developing economy borrowers, who in turn would buy manufactured goods from the U.S. and Europe. This would help the global economy and help the U.S. maintain price stability. The Saudis would get more customers and a stable dollar, and the U.S. would force the world to accept dollars because everyone would need the dollars to buy oil.

Behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force. I personally discussed these invasion plans in the White House with Kissinger’s deputy, Helmut Sonnenfeldt, at the time. The petrodollar plan worked brilliantly and the invasion never happened.

Now, 43 years later, the wheels are coming off. The world is losing confidence in the dollar again. China just announced that any oil-exporter that accepts yuan for oil can convert the oil to gold on the Shanghai Gold Exchange and hedge the hard currency value of the gold on the Shanghai Futures Exchange.

The deal has several parts, which together spell dollar doom. The first part is that China will buy oil from Russia and Iran in exchange for yuan.

The yuan is not a major reserve currency, so it’s not an especially attractive asset for Russia or Iran to hold. China solves that problem by offering to convert yuan into gold on a spot basis on the Shanghai Gold Exchange.

This straight-through processing of oil-to-yuan-to-gold eliminates the role of the dollar.

To continue reading: Cracks in Dollar Are Getting Larger