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"It's A Huge Story": China Launching "Petroyuan" In Two Months

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Thanks Buti. With Country after Country using their own local currencies in contracts business deals and currency swaps . I don't see how THIS dollar can regain itself going forward . Bring on the currency changes !

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Dudes and Dudettes . It aint nothin but a thang. 73% of the worlds nations hold the USD in their reserves.  China may be at 6-7 % of the countries holding the Yuan.  Not even close to the USD. With the Chinese getting caught illegally selling oil to N.K.  on the down low while we were watching . When we go to the UN to have China, who voted for the sanctions on N.K. , sanctioned by the UN this will have a world wide negative effect on their petro currency. God help them if our no frills hard talking POTUS and Ambassador Hailey sanction any or all of China's bank. That would for sure hurt China economically. If our USD is on a  temporary downward trend, which it may or may not be gotta check the charts,  all we need to do is pay off some debt with China with cheap money. Which will help our bottom-line and National Debt. Which may be the spark we need to raise the world value of the USD. Yet wait. We may not want to raise the value of the USD because if it goes up we will loose our competitiveness on the world market, between us and the other countries of the world. 

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China Plans to Break Petrodollar Stranglehold

Beijing to set up oil-futures trading in the yuan which will be fully convertible into gold on the Shanghai and Hong Kong exchanges

Global Research, December 27, 2017
Asia Times 21 December 2017
Region: Asia

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Petrodollars have dominated the global energy markets for more than 40 years. But now, China is looking to change that by replacing the word dollars for yuan.

Nations, of course, have tried this before since the system was set up by former US Secretary of State Henry Kissinger in tandem with the House of Saud back in 1974

Vast populations across the Middle East and Northern Africa quickly felt the consequences when Iraq’s Saddam Hussein decided to sell oil in euros. Then there was Libya’s Muammar Gaddafi’s pan-African gold dinar blueprint, which failed to create a splash in an oil barrel.

Fast forward 25 years and China is making a move to break the United States petrodollar stranglehold. The plan is to set up oil-futures trading in the yuan, which will be fully convertible into gold on the Shanghai and Hong Kong foreign exchange markets.

The Shanghai Futures Exchange and its subsidiary, the Shanghai International Energy Exchange (INE), have already run four simulations for crude futures.

It was expected to be rolled out by the end of this year, but that looks unlikely to happen. But when it does get off the ground in 2018, the fundamentals will be clear – this triple oil-yuan-gold route will bypass the mighty green back.

The era of the petroyuan will be at hand.

Still, there are questions on how Beijing will technically set up a rival futures market in crude oil to Brent and WTI, and how China’s capital controls will influence it.

Bejing has been quite discreet on this. The petroyuan was not even mentioned in the National Development and Reform Commission documents following the 19th National Congress of the Communist Party last October. 

What is certain is that the BRICS, the acronym for Brazil, Russia, India, China and South Africa, did support the petroyuan move at their summit in Xiamen earlier this year. Diplomats confirmed that to Asia Times.

Venezuela is also on board. It is crucial to remember that Russia is number two and Venezuela is number seven among the world’s Top 10 oil producers. Beijing already has close economic ties with Moscow, while it is distinctly possible that other producers will join the club. 

“This contract has the potential to greatly help China’s push for yuan internationalization,”Yao Wei, chief China economist at Societe Generale in Paris, said when he hit the nail firmly on the head.

An extensive report by DBS in Singapore also hits most of the right notes, linking the internationalization of the yuan with the expansion of the grandiose Belt and Road Initiative.

Next year, six major BRI projects will be on the table. 

Mega infrastructure developments will include the Jakarta-Bandung high-speed railway, the China-Laos railway and the Addis Ababa-Djibouti railway. The other key projects will be the Hungary-Serbia railway, the Melaka Gateway project in Malaysia and the upgrading of Gwadar port in Pakistan.

HSBC has estimated that the expansive Belt and Road program will generate no less than an additional, game-changing US$2.5 trillion worth of new trade a year.

It is important to remember that the “belt” in BRI is a series of corridors connecting Eastern China with oil-gas rich regions in Central Asia and the Middle East. The high-speed rail networks, or new “Silk Roads”, will simply traverse regions filled with, what else, un-mined gold.   

But a key to the future of the petroyuan will revolve around the House of Saud, and what it will do. Should the Crown Prince, Mohammad bin Salman bin Abdulaziz Al Saud, also known as MBS, follow Russia’s lead? If it did, this would be one of the paradigm shifts of the century. 

Yet there are signs of what could happen. Yuan-denominated gold contracts will be traded not only in Shanghai and Hong Kong but also in Dubai. Saudi Arabia is also considering issuing so-called Panda bonds, with close ally, the United Arab Emirates, taking the lead in the Middle East for Chinese interbank bonds. 

Of course, the prelude to D-Day will be when the House of Saud officially announces it accepts the yuan for at least part of its exports to China. But what is clear is that Saudi Arabia simply cannot afford to alienate Beijing as one of its top customers.

In the end, it will be China which will dictate future terms. That may include extra pressure for Beijing’s participation in Aramco’s IPO. In parallel, Washington would see Riyadh embracing the petroyuan as the ultimate red line.

An independent European report pointed to what might be Beijing’s trump card – “an authorization to issue treasury bills in yuan by Saudi Arabia” as well as the creation of a Saudi investment fund and a 5% share of Aramco.

Nations hit hard by US sanctions, such as Russia, Iran and Venezuela, will be among the first to embrace the petroyuan. Smaller producers, such as Angola and Nigeria, are already selling oil and gas to the world’s second largest economy in Chinese currency.

As for nations involved in the new “Silk Roads” program that are not oil exporters such as Pakistan, the least they can do is replace the dollar in bilateral trade. This is what Pakistan’s Interior Minister Ahsan Iqbal is currently mulling over.

Of course, there will be a “push back” from the US. The dollar is still the global currency, even though it might have lost some of luster in the past decade.

But the BRICS, as well as the Shanghai Cooperation Organisation, or SCO, which includes prospective members Iran and Turkey, are increasingly settling bilateral and multilateral trade by bypassing the green back.

In the end, it will not be over until the fat (golden) lady sings.  When the beginning of the end of the petrodollar system becomes a fact, watch out for a US counterpunch.

 

https://www.globalresearch.ca/china-plans-to-break-petrodollar-stranglehold/5624039

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Will the Petroyuan Kill the Petrodollar?

 

 

COLUMNISTS

14:43 29.12.2017(updated 14:29 30.12.2017)Get short URL
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You know that the jig is up for the petrodollar when the best argument its apologists can come up with is that "the petrodollar system is bad, but a petroyuan system will be worse." Of course, the petrodollar won’t be dethroned tomorrow, but the writing is definitely on the wall.

China is expected to launch its first yuan-denominated oil futures contract in 2018, and that will mark the beginning of the end for the dollar’s domination of the global oil trade.

The threat of the petroyuan is now considered serious enough to warrant a hatchet job published in The Wall Street Journal. It the article “China’s Bid to Dominate Oil Pricing Will Fail,” Nathaniel Taplin lists a whole bunch of reasons China’s attempts to establish an alternative pricing and trading mechanism for the global oil trade is doomed to failure. However, the arguments presented in the article all boil down to a single thesis: the Chinese leadership is so inept, that it will surely botch every aspect of the petroyuan project launch. That’s a brave, bold and wrong assumption.

READ MORE: Russian Finance Ministry Plans to Issue First Yuan Bonds Worth $1Bln in 2018

The "petroyuan project" has been in the works since 2009, and Beijing has had all the time in the world to prepare for the launch of yuan-denominated oil trading, and that obviously includes ironing out the kinks in its regulatory environment. Special provisions have been made to allow foreign participants seamless access to the Shanghai Futures Exchange where the new contract will be traded and it is known that major international oil companies and traders were involved in creating the required regulatory framework. Beijing clearly wants its crucial energy project to be successful, and will likely go to significant lengths to make it attractive for foreign oil companies.

 

A strong argument against the petroyuan is that the yuan itself is not a very user-friendly currency, compared to the US dollar or Euro. Moving significant amounts of yuan in and out of China can be tricky, and the regulations constraining yuan trading could indeed present some difficulties for the would-be users of the new oil futures contract. However, the Chinese authorities are aware of the problem and have already found a neat solution to it. Users of the yuan-denominated futures contracts will have the possibility to instantaneously convert their yuan to gold on the Hong Kong Futures Exchange or the Shanghai Futures Exchange

 

Gold, for obvious reasons, has none of the alleged drawbacks of the yuan. Gold can easily work as a currency, and it is a universally accepted store of value that has a relatively stable price; it is also considered a good hedge for inflation risks. While gold may have its drawbacks when used as a “currency” for oil trading, it also has a unique advantage: gold users are immune to the US financial sanctions. The US Treasury or the White House can easily bar a company or a whole country from using the dollar-based financial system, but gold has no issuing or governing authority and therefore can be used by the countries and companies affected by sanctions. Given the current geopolitical climate, any currency that has an inbuilt ability to bypass the US sanctions becomes an attractive candidate for oil trading.

The Chinese authorities created the link between the Shanghai oil futures exchange and the gold futures exchange in order to give the foreign traders and oil companies a viable guarantee that the Chinese regulators will always play fair. If for whatever reason the foreign oil traders can’t get their yuan out of China (for instance because Beijing decides to impose special capital controls), they can always buy gold, take delivery of the gold bars and leave unscathed. This mechanism also serves as a hedge against yuan devaluation, so it is hard to see any competitive advantage for the current petrodollar system, compared to what China has to offer.

READ MORE: China May Launch Yuan-Denominated Oil Futures in Shanghai by 2018

 

The petrodollar is unlikely to be replaced by a single new “petro-currency”. A more likely scenario is that multiple competing “petro-currencies” will chip away at the dollar’s market share. The petroyuan will be joined by “petrogold” and maybe even the “petroruble,” because Russia is trying to create a ruble-based trading and pricing mechanism for its oil exports, using the Urals oil futurestraded on the Saint-Petersburg International Mercantile Exchange.

 

One of Saxo Bank’s "outrageous predictions" for next year is that 2018 will be the year of the petroyuan: "With US global power and reach waning, and given the success of yuan-based commodity futures in general, the Shanghai International Energy Exchange’s decision to launch a yuan-based crude oil future is a runaway success." However, even if the petrodollar system survives another year and is not immediately killed by the petroyuan, it will still face death by a thousand cuts. The launch of the yuan-based oil trading will be the first cut, but definitely not the last, claims the bank.

The views and opinions expressed by Ivan Danilov are those of the author and do not necessarily reflect those of Sputnik.        

 

https://sputniknews.com/columnists/201712291060406973-petroyuan-kills-petrodollar/

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Pakistan's State Bank Green Lights Yuan-Based Trade With China

 

ASIA & PACIFIC

16:01 03.01.2018(updated 16:42 03.01.2018)Get short URL

 

The State Bank of Pakistan (SBP) has announced that all arrangements for using the Chinese currency for trade and investment are already in place.

The central bank of Pakistan has given permission for the Chinese yuan to be used for investment and bilateral trade deals, which will eventually replace the dollarin Pakistan-China trade.

The increase in trade and investment with China under the China-Pakistan Economic Corridor (CPEC) makes it easier for Pakistan to see that CNY-denominated trade with China will increase significantly and will provide with long term benefits for both the countries.

"SBP has already put in place the required regulatory framework which facilitates use of CNY in trade and investment transactions," the press release of the central bank stated.

 

In late December Pakistan’s Minister for Planning and Development Ahsan Iqbal said that the government was considering a Chinese proposal to use the renminbi or yuan instead of the US dollar for payments in all bilateral trade. 

 

The minister further said that China had not stopped CPEC-related investments in Pakistan and all projects had been identified and committed to by both sides. The areas of cooperation include connectivity, energy, trade and industrial parks, agricultural development and poverty alleviation, tourism, people’s livelihood and exchange programs and financial cooperation, Dawn news reported.

Pakistan and China have also agreed to establish and improve cross-border credit systems and financial services. In the near future plans strengthening currency swap arrangements and the establishment of a bilateral payment and settlement system will also take place.

Hence with the central bank’s approval this cooperation will take on another dimension as it means that Pakistani and Chinese banks will, in the course of time, be able to open import letters of credit in rupees and yuan.

 

Pakistan will be able to pay for imports from China in yuan rather than in dollars, and Chinese companies investing in CPEC projects will bring in yuan-denominated funds to Pakistan and remit back their profits and dividends also in yuan instead of dollars or other foreign currencies.

 

"The SBP, in the capacity of the policy maker of financial and currency markets, has taken comprehensive policy related measures to ensure that imports, exports and financing transactions can be denominated in yuan," Dawn news reported quoting the bank's statement.

Furthermore, even non-Chinese companies participating in the CPEC will be able to do bilateral trade via their Chinese principal companies, according to the publication.

“The dollar may remain the most dominant medium of exchange for the foreseeable future. But if Islamabad and Beijing can materialize their dream [to settle bilateral trade and investment transactions in rupees and yuan], we can reduce our dependence on the greenback gradually over a long time,” the head of a large Pakistani bank told Dawn news in a comment.

The banker also said that once proper developments are made the free flow of capital and cross-border transfer of lawful funds between the two countries would become much easier, curbing the need for more complex centralized international clearing systems in New York and London.

 

https://sputniknews.com/asia/201801031060493758-pakistan-state-bank-yuan-trade-china/

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Petro-Yuan Looms - How China Will Shake Up The Oil Futures Market

Profile picture for user Tyler Durden
Wed, 01/03/2018 - 22:50

The "huge story",as Graticule's Adam Levinson called it, will, it appears, be a "wake up call" for the West that seems to happily be ignoring this potential bombshell that is China's looming launch of domestic oil futures trading.

Additionally, Levison warns Washington that besides serving as a hedging tool for Chinese companies, the contract will aid a broader Chinese government agenda of increasing the use of the yuan in trade settlement... and thus the acceleration of de-dollarization and the rise of the Petro-Yuan.

“I don’t think there’s any doubt we’re going to see use of the renminbi in reserves go up substantially”

China has been planning this for a number of years and given rising tensions, now seems like a good time for China to flex a little.

The Shanghai International Energy Exchange, a unit of Shanghai Futures Exchange, will be known by the acronym INE and will allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest -- a first for China’s commodities markets -- because the exchange is registered in Shanghai’s free trade zone. Even  Bloomberg admits there are implications for the U.S. dollar’s well-established role as the global currency of the oil market, as Sungwoo Park sums up some of the key questions...

1. When will trading begin?

According to the Shanghai-based news portal Jiemian, which cited an unidentified person from a futures company, trading is expected to start Jan. 18. Multiple rounds of testing have been carried out and all listing requirements met. The State Council, China’s cabinet, was said to have given its approval in December, one of the final regulatory hurdles. The push for oil futures gained impetus in 2017 when China surpassed the U.S. as the world’s biggest crude importer.

 

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2. Why is this important for China?

Futures trading would wrest some control over pricing from the main international benchmarks, which are based on dollars. Denominating oil contracts in yuan would promote the use of China’s currency in global trade, one of the country’s key long-term goals. And China would benefit from having a benchmark that reflects the grades of oil that are mostly consumed by local refineries and differ from those underpinning Western contracts.

3. How do oil futures work?

Futures contracts fix prices today for delivery at a later date. Consumers use them to protect against higher prices down the line; speculators use them to bet on where prices are headed. In 2017, oil futures contracts in New York and London outstripped physical trading by a factor of 23. Crude oil is among the most actively traded commodities, with two key benchmarks: West Texas Intermediate, or WTI, which trades on the New York Mercantile Exchange, and Brent crude, which trades on ICE Futures Europe in London.

4. Why didn’t China begin trading futures until now?

Lower crude prices have played a part. Chinese oil futures were proposed in 2012 following spikes above $100 a barrel, but prices in 2017 have averaged little more than $50. There’s also concern over volatility. China introduced domestic crude futures in 1993, only to stop a year later because of volatility. In recent years, it repeatedly delayed its new contract amid turmoil in equities and financial markets. Such destabilizing moves have often prompted China’ government to intervene in markets in one way or another.

5. What’s China’s track record in commodities?

Nickel was the last major commodity to be listed there in 2015; within six weeks, trading in Shanghai surpassed benchmark futures on the London Metal Exchange, or LME. In China, speculators play a far greater role, boosting trading volumes but making markets susceptible to volatility. In early 2016, the then-head of the LME said it was possible some Chinese traders did not even know what they were trading as investors piled into everything from steel reinforcement bars to iron ore. Steep price rises relented when China intervened with tighter trading rules, higher fees and shorter trading hours.

6. Will foreigners buy Chinese oil futures?

That remains to be seen. Overseas oil producers and traders would need to swallow not just China’s penchant for occasional market interventions but also its capital controls. Restrictions on moving money in and out of the country have been tightened in the past two years after a shock devaluation of the yuan in 2015 prompted a surge in money leaving the mainland. Similar hurdles have kept foreign investors as bit players in China’s giant stock and bond markets.

7. Could the yuan challenge the dollar’s dominance in oil?

Not any time soon, since paying for oil in dollars is an entrenched practice, according to some analysts. Shady Shaher, head of macro strategy at Dubai-based lender Emirates NBD PJSC, says it makes sense in the long run to look at transactions in yuan because China is a key market, but it will take years. Bloomberg Gadfly columnist David Ficklingargues that China doesn’t have “nearly the influence in the oil market needed to carry out such a coup.” On the other hand, paying in yuan for oil could become part of President Xi Jinping’s "One Belt, One Road" initiative to develop ties across Eurasia, including the Middle East. Chinese participation in Saudi Aramco’s planned initial public offering could help sway Saudi opinion toward accepting yuan, which is used in only about 2 percent of global payments.

With regards that final point from Bloomberg, Pepe Escobar disagrees, recently concludingthe era of the petro-yuan is at hand...

Intractable questions referring to the US dollar as top reserve currency have been discussed at the highest levels of JP Morgan for at least five years now. There cannot be a more politically charged dossier. The NSS duly sidestepped it.

The current state of play is still all about the petrodollar system; since last year what used to be a key, “secret” informal deal between the US and the House of Saud is firmly in the public domain.

Even warriors in the Hindu Kush may now be aware of how oil and virtually all commodities must be traded in US dollars, and how these petrodollars are recycled into US Treasuries. Through this mechanism Washington has accumulated an astonishing $20 trillion in debt – and counting.

Vast populations all across MENA (Middle East-Northern Africa) also learned what happened when Iraq’s Saddam Hussein decided to sell oil in euros, or when Muammar Gaddafi planned to issue a pan-African gold dinar.

But now it’s China who’s entering the fray, following on plans set up way back in 2012. And the name of the game is oil-futures trading priced in yuan, with the yuan fully convertible into gold on the Shanghai and Hong Kong foreign exchange markets.

The Shanghai Futures Exchange and its subsidiary, the Shanghai International Energy Exchange (INE) have already run four production environment tests for crude oil futures. Operations were supposed to start at the end of 2017; but even if they start sometime in early 2018 the fundamentals are clear; this triple win (oil/yuan/gold) completely bypasses the US dollar.

The era of the petro-yuan is at hand.

Of course there are questions on how Beijing will technically manage to set up a rival mark to Brent and WTI, or whether China’s capital controls will influence it. Beijing has been quite discreet on the triple win; the petro-yuan was not even mentioned in National Development and Reform Commission documents following the 19th CCP Congress last October.

What’s certain is that the BRICS supported the petro-yuan move at their summit in Xiamen, as diplomats confirmed to Asia Times. Venezuela is also on board. It’s crucial to remember that Russia is number two and Venezuela is number seven among the world’s Top Ten oil producers. Considering the pull of China’s economy, they may soon be joined by other producers.

Yao Wei, chief China economist at Societe Generale in Paris, goes straight to the point, remarking how “this contract has the potential to greatly help China’s push for yuan internationalization.”

It ain’t over till the fat (golden) lady sings. When the beginning of the end of the petrodollar system – established by Kissinger in tandem with the House of Saud way back in 1974 – becomes a fact on the ground, all eyes will be focused on the NSS counterpunch.

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Iran Sanctions Will Help China's Petro-Yuan

Profile picture for user Tyler Durden
Tue, 01/09/2018 - 05:00

Authored by Nick Cunningham via OilPrice.com,

In a few days, U.S. President Trump may try to re-impose sanctions on Iran, a dramatic step that could heighten tensions between the two countries. Some analysts believe the move could contribute to a much broader global economic power shift from the U.S. to China.

The connection between the issues may not be obvious at first glance, but by seeking to isolate Iran from the international market, Iran could look elsewhere.

 

https://www.zerohedge.com/sites/default/files/inline-images/20180108_yuan.png

Because the global oil trade is conducted in greenbacks, the U.S Treasury was able to restrict Iran’s ability to access the global financial system in the past. That made it extremely difficult for Iran to sell its oil prior to the thaw in relations in 2015, which kept millions of barrels of daily oil production on the sidelines.

This time around, however, the U.S. will likely go it alone. The Trump administration won’t have the backing of the international community in its campaign to resurrect sanctions against Iran, which will make isolation much more difficult. A few months ago, Goldman Sachs predicted that unilateral sanctions from the U.S. could affect a few hundred thousand barrels per day from Iran, but without help from the rest of the world, the effort would not curtail nearly the same amount of oil as the last time around.

Moreover, some analysts argue that the Washington crackdown could merely push Iran to begin selling oil under contracts denominated in yuan rather than dollars.

“Potential consequent reactivation of sanctions may cause Iran to export oil using the Chinese Yuan denominated contract, which launches on 18 January,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement.

This may spark a move away from the present long-established U.S. Dollar (USD) denominated oil trading regime.”

For a while, China has worked to launch a yuan-denominated oil futures contract—a move that would symbolize, as well as contribute to, the ascendance of the Chinese economy as a rival to long-held U.S. hegemony. Reports suggest China is planning to allow trading in the oil futures contract on the Shanghai Futures Exchange on January 18.

“The increased threat of renewed U.S. banking/USD sanctions on Iran alone is likely to boost Iran’s interest in the new Yuan oil contract,” said Bjarne Schieldrop of SEB. “China will benefit considerably from such developments.” Schieldrop argues that the more that the oil trade is conducted in yuan, the more the Chinese currency will be recognized as a major, or even a central, global currency.

“While the USD will not be replaced overnight as the world’s reserve currency nor as the one most commonly used for crude oil trading, it will be negative for the greenback, which will cease to be the crude oil market’s only ruling currency,” Schieldrop added.

The implications aren’t just a concern for national security types sitting in Washington. The weakening of the dollar could result in higher oil prices. “A potentially significantly weaker dollar would mean a much higher Brent crude oil price in nominal terms making today’s longer-term nominal prices a bargain,” Schieldrop said.

China has had some false starts in its quest to launch its yuan-denominated futures contract, but the official launch appears to be only days away. The contract will only be powerful to the extent that it becomes highly liquid and widely traded, which will only be achieved when more of the global oil trade is conducted in the currency. Meanwhile, Russia recently announced that it would sell $1 billion worth of yuan-denominated bonds in 2018—another move that will bolster the rise of the yuan as a top global currency.

But investors are unlikely to jump full on into the petro-yuan just yet; capital controls in China will deter some interest. Any transition from the U.S. dollar to the yuan will take years. But milestones such as an oil futures contract are one of the many building blocks needed to push the greenback off of its perch.

Washington could unwittingly accelerate the changeover. President Trump has sought to “make America great again,” but his effort to isolate Iran could have the side effect of pushing OPEC’s third-largest exporter onto the Chinese currency—giving a boost to China’s rise.

 

https://www.zerohedge.com/news/2018-01-08/iran-sanctions-will-help-chinas-petro-yuan

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JANUARY 10, 2018 / 5:13 AM / UPDATED AN HOUR AGO

China officials recommend slowing or halting U.S. bond purchases - Bloomberg

 

Reuters Staff

1 MIN READ

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LONDON, Jan 10 (Reuters) - Officials reviewing China’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, Bloomberg News reported on Wednesday, citing people familiar with the matter.

China has the world’s biggest currency reserves and is the biggest foreign holder of U.S. government debt.

According to the Bloomberg report, the sources said the market for U.S. government bonds is becoming less attractive relative to other assets. They also cited trade tensions with the United States as a reason to slow Treasury purchases, the report said.

Traders cited the report for a renewed rise in U.S. Treasury yields during European trade, with the U.S. 10-year bond yield rising to a new 10-month high at 2.593 percent. The U.S. dollar fell 0.6 against a basket of currencies for its biggest one-day drop in a month. (Reporting by Dhara Ranasinghe; editing by Sujata Rao)

 
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Will The Dollar Survive The Rise Of The Yuan And The End Of The Petrodollar?

Profile picture for user Tyler Durden
Thu, 01/11/2018 - 16:25

Authored by Alasdair Macleod via The Mises Institute,

This might seem a frivolous question, while the dollar still retains its might, and is universally accepted in preference to other, less stable fiat currencies. However, it is becoming clear, at least to independent monetary observers, that in 2018 the dollar’s primacy will be challenged by the yuan as the pricing medium for energy and other key industrial commodities. After all, the dollar’s role as the legacy trade medium is no longer appropriate, given that China’s trade is now driving the global economy, not America’s.

 

https://www.zerohedge.com/sites/default/files/inline-images/20180108_yuan_0.png

At the very least, if the dollar’s future role diminishes, then there will be surplus dollars, which unless they are withdrawn from circulation entirely, will result in a lower dollar on the foreign exchanges. While it is possible for the Fed to contract the quantity of base money (indeed this is the implication of its desire to reduce its balance sheet anyway), it would also have to discourage and even reverse the expansion of bank credit, which would be judged by central bankers to be economic suicide. For that to occur, the US Government itself would also have to move firmly and rapidly towards eliminating its budget deficit. But that is being deliberately increased by the Trump administration instead.

Explaining the consequences of these monetary dynamics was the purpose of an essay written by Ludwig von Misesalmost a century ago. At that time, the German hyperinflation was entering its final phase ahead of the mark’s eventual collapse in November 1923. Von Mises had already helped to stabilize the Austrian crown, whose own collapse was stabilized at about the time he wrote his essay, so he wrote with both practical knowledge and authority.

The dollar, of course, is nowhere near the circumstances faced by the German mark at that time. However, the conditions that led to the mark’s collapse are beginning to resonate with a familiarity that should serve as an early warning. The situation, was of course, different. Germany had lost the First World War and financed herself by printing money. In fact, she started down that route before the war, seizing upon the new Chartalist doctrine that money should rightfully be issued by the state, in preference to the established knowledge that money’s validity was determined by markets. Without abandoning gold for her own state-issued currency, Germany would never have managed to build and finance her war machine, which she did by printing currency. The ultimate collapse of the mark was not mainly due to the Allies’ reparations set at the treaty of Versailles, as commonly thought today, because the inflation had started long before.

The dollar has enjoyed a considerably longer life as an unbacked state-issued currency than the mark did, but do not think the monetary factors have been much different. The Bretton Woods agreement, designed to make the dollar appear “as good as gold”, was cover for the US Government to fund Korea, Vietnam and other foreign ventures by monetary inflation, which it did without restraint. That deceit ended in 1971, and today the ratio of an ounce of gold to the dollar has moved to about 1:1310 from the post-war rate of 1:35, giving a loss of the dollar’s purchasing power, measured in the money of the market, of 97.3%.

True, this is not on the hyperinflationary scale of the mark — yet. Since the Nixon shock in 1971, the Americans have been adept at perpetuating the myth of King Dollar, insisting gold now has no monetary role at all. By cutting a deal with the Saudis in 1974, Nixon and Kissinger ensured that all energy, and in consequence all other commodities, would continue to be priced in dollars. Global demand for dollars was assured, and the banking system of correspondent nostro accounts meant that all the world’s trade was settled in New York through the mighty American banks. And having printed dollars to ensure higher energy prices would be paid, they would then be recycled as loan capital to America and her friends. The world had been bought, and anyone not prepared to accept US monetary and military domination would pay the price.

That was until now. The dollar’s hegemony is being directly challenged by China, which is not shy about promoting her own currency as her preferred settlement medium. Later this month an oil futures contract priced in yuan is expected to start trading in Shanghai.1 Only last week, the Governor of China’s central bank met the Saudi finance minister, presumably to agree, amongst other topics, the date when Saudi Arabia will start to accept yuan for oil sales to China. The proximity of these two developments certainly suggest they are closely related, and that the end of the Nixon/Saudi deal of 1974, which created the petrodollar, is in sight.

Do not underestimate the importance of this development, because it marks the beginning of a new monetary era, which will be increasingly understood to be post-dollar. The commencement of the new yuan for oil futures contract may seem a small crack in the dollar’s edifice, but it is almost certainly the beginning of its shattering.

America’s response to China’s monetary maneuvring has always been that of a nation on the back foot. For the last year, the yuan has been rising against the dollar, following President Trump’s inauguration. Instead of responding to China’s hegemonic threat by increasing America’s role in foreign trade, President Trump has threatened all and sundry with trade restrictions and punitive tariffs. It is a policy which could not be more designed to undermine America’s global economic status, and with it the role of the dollar.

In monetary terms, this leads us to a further important parallel with Germany nearly a century ago, and that is the contraction of the territory and population over which the mark was legal tender then, and the acceptance of the dollar today. The loss of Germany’s colonies in Asia and Africa, Alsace-Lorraine to France, and large parts of Prussia to Poland, reduced the population that used the mark without a compensating reduction of the quantity of marks in circulation. Until very recently, most of the world was America’s monetary colony, and in that context, she is losing Asia, the Middle East and some countries in Africa as well. The territory that offers fealty to the dollar is definitely contracting, just as it did for the German mark after 1918, and as it did for the Austro-Hungarians, whose Austrian crown suffered a similar fate.

The relative slowness of the dollar’s decline so far should not fool us. The factors that led to the collapse of the German mark in 1923 are with us in our fiat currencies today. As Mises put it,

If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely.

Updated for today’s monetary system, this is precisely how the American government finances itself. Instead of printing notes, it is the expansion of bank credit, issued by banks licensed by the government with this purpose in mind, that ends up being subscribed for government bonds. The same methods are employed by all advanced nations, giving us a worrying global dimension to the ultimate failure of fiat currencies, whose only backing is confidence in the issuers.

Now that America is being forced back from the post-war, post-Nixon-shock strategy of making the dollar indispensable for global trade, the underlying monetary inflation of decades will almost certainly begin to be reflected in the foreign and commodity exchanges. There is little to stand in the way of the global fiat monetary system, led by the dollar, to begin a breakdown in its purchasing power, as prophesied by Mises nearly a century ago. Whether other currencies follow the dollar down the rabbit hole of diminishing purchasing power will to a large extent depend on the management of the currencies concerned

How a Fiat Currency Dies

The last thing anyone owning units of a state-issued currency will admit to is that they may be valueless. Only long after it has become clear to an educated impartial monetary observer that this is the case, will they abandon the currency and get rid of it for anything while someone else will still take it in exchange for goods. In the case of the German hyperinflation, it was probably only in the last six months or so that the general public finally abandoned the mark, despite its legal status as money.

Mises reported that throughout the monetary collapse, until only the final months, there persists a general belief that the collapse in the currency would soon end, there always being a shortage of it. The change in this attitude was marked by the moment people no longer just bought what they needed ahead of actually needing it. Instead, they began to buy anything, just to get rid of the currency. This final phase is what Mises called the crack-up boom, though some far-sighted individuals had already acted well ahead of the crowd. Both these phases are still ahead for the American citizen. However, we can now anticipate how the first is likely to start, and that will be through dollars in foreign hands being replaced for trade purposes with the yuan, and then sold into the foreign exchanges.

Once the process starts, triggered perhaps by the petrodollar’s loss of its trade settlement monopoly, it is not beyond the bounds of possibility for the dollar to initially lose between a third and a half of its purchasing power against a basket of commodities, and a similar amount against the yuan, which is likely to be managed by the Chinese to retain its purchasing power. It will be in the interests of the Chinese authorities to promote the yuan as a sounder currency than the dollar to further encourage foreign traders to abandon the dollar. From China’s point of view, a stronger yuan would also help ensure price stability in her domestic markets, at a time when countries choosing to remain on a dollar-linked monetary policy will be struggling with rising price inflation.

There then emerges a secondary problem for the dollar. A fiat currency depends in large measure for its value on the credibility of the issuer. A weakening dollar, and the bear market in bonds that accompanies it, will undermine the US Government’s finances, in turn further eroding the government’s financial credibility. This will be happening after an extended period of the US Government being able to finance its deficits at artificially low interest rates, and is therefore unprepared for this radical change in circumstances.

As the dollar’s purchasing power comes under attack, lenders, whether they be those with surplus funds, or their banks acting as their agents, will increasingly take into account the declining purchasing power of the dollar in setting a loan rate. In other words, time-preference will again begin to dominate forward rates, and not central bank interest rate policy. This will be reflected in a significantly steeper yield curve in the bond market, forcing borrowers into very short-term financing or using other, more stable monetary media to obtain capital for longer-term projects. This, again, plays into the yuan becoming the preferred currency, possibly with a rapidity that will be unexpected.

The US Government is obviously ill-equipped for this drastic change in its circumstances. The correct response is to eliminate its budget deficit entirely, and refuse to bail out failing banks and businesses. Bankruptcies will be required to send surplus dollars to money heaven and therefore stabilise the dollar’s purchasing power. A change in the Fed’s attitude towards its banks and currency is, however, as unlikely as that of the Reichsbank subsequent to the Versailles Treaty.

Therefore, it follows that capital markets in dollars will inevitably be severely disrupted, and market participants will seek alternatives. Remember that the dollar’s strength has been based on its function in trade settlement and its subsequent deployment as the international monetary capital of choice. Both these functions can be expected to go into reverse as the trade settlement function is undermined.

Whether China will be tempted to employ the same methods in future to support the yuan as the Americans have during the last forty-three years for the dollar, remains to be seen. It may not be a trick that can be repeated. There is a great danger that a significant fall in the dollar will lead to global economic stagnation, coupled with escalating price inflation, affecting many of China’s trading partners. China will want to insulate herself from these dangers without adding to them by going for full-blown hegemony.

We are beginning, perhaps, to see this reflected in rising prices for gold and silver.

China has effectively cornered the market for physical gold, the only sound money of the market that over millennia has survived all attempts by governments to replace it. Her central planners appear to have long been aware of the West’s Achilles’ heel in its monetary affairs, and have merely been playing along to China’s own advantage. As the dollar weakens in the coming years, her wisdom in securing for herself and her citizens the one form of money that’s no one else’s liability will ensure her survival in increasingly turbulent times.

Now that’s strategic thinking.

 

https://www.zerohedge.com/news/2018-01-10/will-dollar-survive-rise-yuan-and-end-petrodollar

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