Over the past three years the Chinese Yuan (RMB) has grown as a global trade currency from a starting point of around 3%, to its current level of over 12%. And with 60 central banks around the world investing in the Yuan, and 30 nations having direct currency swap lines for the RMB, China is right on the cusp of exploding into a full fledged trade currency to not only compete with the dollar, but to summarily end its reign as the global reserve.
In fact, China is so close to achieving this goal that America’s reign over the reserve currency may hinge on the IMF’s upcoming decision to allow the Yuan to be part of its SDR basket, which would facilitate the spreading of Yuan based bonds to all corners of the financial system. And if this happens, the majority of global trade partners, especially those in Asia and Eurasia, are prepared to completely divest themselves from the dollar and begin a new environment of direct bi-lateral trade using no middleman at all.
South Korea, which sends around a quarter of its exports to China, is one of the few countries in the world to run a trade surplus with the Asian giant.
Both countries want more of this trade to be done in yuan, which would make trade cheaper by avoiding the need to convert funds into US dollars or euros before completing trades.
Earlier this year, South Korea became one of the newest offshore yuan trading centers.
South Korea is not alone in pushing to do more business based on the Chinese currency,particularly in Asia where the Chinese mainland is the largest trading partner of manycountries in the region. In fact, rare is the country in the region that is not working hard to take a larger chunk of yuan-denominated business.
The yuan’s momentum will get a fillip if the International Monetary Fund includes the currency in its Special Drawing Rights basket in October.
There are more than 60 central banks around the world that invest in the yuan, and China has currency swap agreements with 30 countries. As of April, currency swap deals had added upto 3.14 billion yuan ($500 million). – China Daily
The dollar as the global reserve currency first emerged from the Bretton Woods conference in 1944, but later broke the agreement in 1971 when they shut off the dollar from its original gold backing. Two years later, in the midst of the Oil Crisis, the dollar was then backed by oil and through a petro-dollar agreement with OPEC that forced the world to continue to use it as the global reserve because of their need for imported energy.
However, several nations, including Russia, Norway, and even Great Britain have forged their own energy markets outside of OPEC, and have created the catalyst for ending the petro-dollar and U.S. hegemony over the reserve currency. And beginning in 2013, when Russia and China signed a historic agreement to sell oil in either Roubles or Yuan, the dollar’s hold on the world was finally shattered and has declined in use ever since.
China is the most likely candidate to control the direction of the next reserve currency, both because of their economic dominance and their reported 20-30,000 tons of gold which they intend to use to back a trade note in the near future. And even though there is no new Bretton Woods conference to determine who will control the next global reserve currency, China is instead creating the foundations for a de facto change from the dollar to the RMB, and nations everywhere are quickly buying into it.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.