International investors
will continue to witness the move away from the United States Dollar (USD). The abandonment of the dollar picked up pace in 2012 when China and Japan decided they would no longer use the USD in bilateral trade. As China and Japan are the second and third largest economies respectively in the world, this was a major blow to the prestige and influence of the American dollar.
As recently as 2011 two way trade between China and Japan used the USD in 60% of all transactions. Direct currency trade agreements allow 2 countries to trade directly in their own currencies. There are no extra costs or risks involved as was the case when using the USD. It also means that both countries will need to hold more of the other country’s currency in reserves, to facilitate the new trade pattern. It automatically creates new demand for these currencies and bypasses the USD altogether.
China has already signed direct currency agreements with over 20 countries to date. In addition to Japan, the list includes Australia, Brazil, Indonesia, Malaysia, Russia, South Korea, and most troubling the United Arab Emirates. The understanding with the UAE is a direct threat to the dollar’s petrodollar status.
In 2013 the European Central Bank and the Bank of England also signed currency agreements with China. Together all these countries and institutions represent the major trading and financial centers of the world.
New Currency Agreement Between the UK and China
The increasing use of the Chinese renminbi (yuan) has made the currency one of the top ten most traded international currencies in the world. Although total use of the Chinese currency is still a fraction of the amount of dollars in use for world trade, it is a harbinger of what is to come.
The establishment of these new trade channels indicate, that the rest of the world recognizes the increasing need to diversify away from the USD. When the dollar collapses because of over issuance and debt the other economies of the world will be able to continue to trade and conduct business. That is until the financial calamity, that the end of the USD as the world’s reserve currency, is dealt with.
The increasing use of the yuan in international trade can be seen in the investment community. Companies using yuan denominated debt are seeing sales rise from 221 billion yuan in 2013 from a mere 16 billion yuan in 2009.
The Currency of China
Along with the greater use and acceptance of the world in using China’s currency, is the record amount of gold that the Chinese are buying to support the holding of the yuan. The rise of the renminbi or yuan is the biggest change in the world currency markets since the establishment of the Euro in 1999.
As stated earlier the greatest threat to the USD is in the energy markets. As early as 2012 it was confirmed that China was buying oil from both Russia and Iran using their own currency rather than dollars.
Other oil producing nations like the Sudan and Angola have already announced that they will be selling oil to China without any dollar conversion. Other nations are also taking steps to conduct business in the energy markets minus the USD. Turkey for example, had bought oil from Iran by using gold as a way to get around Western sanctions that had been placed on Iranian oil. India has also purchased Iranian oil by using gold.
In 2013 China passed the United States as the world’s largest net oil importer. China has become Saudi Arabia’s biggest customer for oil. Will Saudi Arabia likewise soon accept renminbi as payment for their oil?
Aramco The Most Valuable Company In the World in Saudi Arabia
Also in 2013 Saudi Arabia announced it intended to reassess its relationship with the United States. The Saudis apparently were not impressed with the United States response to the crisis in Syria. Nor are they convinced that the US intends to stop the rise of Iran in the region and to put enforceable limits on the Iranian nuclear program. This shift in the attitude of Saudi Arabia could very well include the exclusive deal to only use American dollars in transactions involving oil.
This understanding has been in place since the early 1970’s. The Saudis would factor their oil in exchange for American military protection and access to advanced weaponry. In addition, Saudi Arabia would use the surplus generated from its oil wealth to purchase American securities (debt). Other nations in OPEC (Organization of the Petroleum Exporting Countries) located in the Persian Gulf would join this agreement within a few years. This historical grand bargain in now in serious jeopardy.
The recent $400 billion USD natural gas deal between China and Russia which will be in force for the next 30 years will be factored in yuan and rubles. Construction on the pipelines should be completed in 2018. Once the infrastructure is in place, the Chinese will annually buy $24 billion USD of Russian gas for years to come.
New Trade Agreement Between China and Russia
China is using its new found wealth to buy influence not only in Asia but Africa and Latin America as well. Chinese money is helping governments in Cuba, Ecuador and Venezuela to stay in power. It is offering numerous trade and financial deals with countries in the Caribbean. These nations have seen a diminution in US investment and a decline in energy assistance from Venezuela. They are open to more Chinese investment and trade deals, regardless that it will be conducted using Chinese currency.
Other nations are looking at what is happening to the currency of the United States. The fiscal situation is unfathomable in the United States. Government issued debt is spiraling out of control. Adding to the displeasure of the world is the way the dollar is being printed to the tune of trillions of dollars.
USD Most Commonly Traded Currency
Countries everywhere are looking for ways to bypass the dollar, as a way to protect their domestic economies from the coming major devaluation of the USD. Many world leaders feel the continued propping up of the dollar is becoming too expensive.
As more nations continue to look to alternatives to the USD it will add fresh impetus to the rise of China and the yuan. It must be noted that China is looking beyond just economic and financial goals. As any other rising power it is looking at geopolitical issues as well.