Is China avoiding using US dollars?
In the wake of recent statements by Chinese officials about the dollar and dollar assets (see our previous comments here, here and here), it does seem like the Chinese are avoiding dolar-based transactions:
China and Argentina have made a tentative agreement to swap $10bn (£7bn) worth of their currencies.
The move, which allows both countries to bypass the US dollar, makes it easier for Argentine businesses to buy Chinese imports directly in yuan.
It also gives Argentina hard cash at a time when its finances have been hurt by the global financial crisis.
The deal comes after China suggested that the world should create a new reserve currency to replace the dollar.
The swap is being seen as a sign of China’s ambitions in South America.
China primarily imports agricultural products from Argentina, while the South American nation buys Chinese electronic goods.
In the past, China has signed similar deals with South Korea, Malaysia, Belarus and Indonesia.
I don’t see the dollar being replaced any time soon as the world reserve currency. But do China’s actions suggest it is slowly shifting away from dollars?
Source
China and Argentina in $10bn deal – BBC News
And what does Argentina do with their accumulated Yuan? My guess is that Venezuela and/or Iran will begin to accept it for oil. They will need an energy-rich third party to complete the circle.
It’s an interesting back door method to move the Yuan to wider acceptance. It is still a pegged currency however. If the Chinese think things are tough now, wait until they try to manage a pegged currency exchanged against those that float. Sweden and Britain can relate to the folly. Soros can tell you the result.
So if China is serious they are probably smart enough to realize the Yuan has to float relatively freely at some point. Where will this leave China and its huge export dependence? Seems like shadows of Japan in the 1970’s. Japan enjoyed their 1980’s heyday and then priced themselves out of their own export markets with an uncontrollably strong Yen.
So this move begs two questions IMO:
Can they float the Yuan on a bilateral basis, country by country, without unforeseen repercussions?
Will a floating Yuan, which I assume the Chinese will anticipate or the market will force, undo the export tiger and stall Chinese growth?
And jumping ahead even further, a floating Yuan will force them to develop internal markets. This seems anathema to the Communist Party’s long term goals – in my limited understanding of them at least. I wonder if they are thinking this far ahead or simply reacting knee-jerk fashion to do what they can to weaken current dollar supremacy.
aitrader, the Chinese are a bit of a mystery here.
Could it be that they were fooled and are now pissed that their paper money is potentially going to be worth less than they assumed? Are they gong to just dump dollars as a result? It’s hard to say because rational thought and action cannot be assumed in tense and difficult economic climates like these.
Argentina is hardly a major player. But your speculation that they are looking to create some sort of non-dollar currency triangle using an energy-rich third party makes sense. Again, until we get confirmation of what the heck their real thinking is here (and the Russians for that matter) all of his is pure speculation.
I’ll toss in an opinion on the Russian motivation. Their call for a new reserve currency actually preceded the Chinese’. The English version of Pravda featured an article highlighting the president of Kazakhstan’s declaration that the dollar reserve is “illegal” a few weeks ago. Pravda serves at the behest of the Russian government and this article was featured, I believe, so that the idea did not appear completely Russian in origin. The next Russian move was to circulate a paper outlining a new reserve currency proposal to China and several other G20 countries a couple of weeks after the Pravda article.
I believe the push for a new reserve based on IMF drawing rights originally came from Russia, and China chimed in after buying into the Russian proposal. The Russian motivation was to force the US into a more flexible stance toward Eastern Europe. Medvedev and Putin are upset about NATO intrusions into what is still perceived as their “back yard” and want leverage to end the US-backed missile shield initiative in Eastern Europe.
Russia has no real leverage over the US to force a new reserve currency. And I can see no real benefit for them to replace the US dollar for another reserve currency where they still have little or no control. I suspect that as the “new” relationship proffered by Obama’s administration gains ground, Russian support for a new reserve currency will weaken considerably.
I sense the Chinese are real here and do want to moe away from the dollar. The Russians certainly want to contain the U.S. and could use the currency debate as a bargaining tool as you suggest.
In the end, momentum for this should gain irrespective of whether the Russians are for real here. Euroland should want change as well as they can enjoy the privileges of seinorage and lower rates if the Euro moves into an equivalent position.
All of this should occur at a relatively glacial pace and only under the threat of continued economic weakness. If we get a cyclical rebound at the end of the year, all of this will be forgotten.