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We have written many times about the need for the Yuan to be a
global currency and eventually a global reserve currency [one of
several]. We have talked of how it had to develop its banking
system before it could take such a journey. We highlighted the
experiments that the Chinese were making first in Hong Kong then in Guanchow
in using the Yuan in international dealings. More importantly we
highlighted the consequences to other world currencies, in particular the
U.S. Dollar, of the Yuan becoming a well used international trade
currency. The day is now here when the Chinese are starting to
propel the Yuan onto the international scene.
These
consequences of its arrival will come over time, but they could come
overnight. One consequence is becoming even clearer, as we
forecast, that the exchange rate of the Yuan will not rise much on foreign
exchanges. Another is central banks will insure against currency
crises in the future by holding gold.
We
discussed just how Chinese exporters and importers could turn from a U.S.
Dollar price to a Yuan price, thus emasculating the U.S. Dollar as quickly as
it takes for banks and international traders to price their goods in the
Yuan. If they act too quickly, the consequences could be chaotic
for global foreign exchanges. If handled carefully the
Dollar’s international use will simply fade, producing major internal
problems as these Dollars come home.
A
number of the world's biggest banks have launched international road shows
promoting the use of the Yuan to corporate customers instead of the Dollar for
trade deals with China. HSBC and Standard Chartered are offering
discounted transaction fees and other financial incentives to companies that
choose to settle trade in the Yuan. Both banks are now capable of
doing Yuan settlement in many parts of the world. All the other
major international banks [such as Citigroup and JPMorgan] are rushing to
join the fray with their own road shows. Beijing wants this to
happen now. Chinese central bank officials are backing the
banks in their efforts. Next year and beyond should see the Yuan
standing next to the Euro and the U.S. Dollar on foreign exchanges.
Cross-border
trade in Yuan totaled Yuan70.6 billion [$10 billion] in the first half of the
year, 20 times the Yuan3.6 billion recorded in the second half of
2009. The eventual potential of global Yuan settled trades is 40
times this new level at $2,800 billion worth of goods and services settled in
the U.S. Dollar and the Euro.
What
will a Global Yuan lead to?
The
development of the Yuan market will be rapid and very dramatic.
Before we begin to discuss the consequences of this change to global trade
let’s reflect on some salient facts.
·
For every Yuan transaction in Chinese trade, there will be one
less U.S. Dollar or Euro trade.
·
As with the U.S. Dollar international market, there will develop
an offshore Yuan market. [MacDonald’s (burger) has already
achieved a Yuan raising offering]
·
The Yuan will be capable of being used between among countries
outside China in trade between themselves.
·
Capital markets will always favor currencies that are based on a
strong growing economy.
·
Once international, the Yuan will take its place in central bank
reserves.
Those
are the facts, but what are the consequences for the global economy,
the U.S. Dollar in international trade, Capital markets and as the
globe’s sole reserve currency, the gold market and for the price of
gold?
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
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