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Decline of America? China Has Been Tactfully Doing Direct Currency Deals With Several Nations For Years

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English: GDP of China from 1953 to 2008, in Re...

English: GDP of China from 1953 to 2008, in Renminbi Yuan. (Photo credit: Wikipedia)

This week’s news that Brazil and China have signed a $30 billion currency swap agreement gave a renewed boost to excited chatter over the rising influence    of China’s currency, the renminbi (RMB). The belief, in many quarters, is that the RMB is well on its way to becoming an    “international” currency — and many, both inside and outside China, are convinced it will inevitably eclipse the U.S. dollar as the world’s leading reserve    currency. China is destined to surpass the U.S. as the world’s largest economy, the thinking goes, so just like everyone uses dollars now, they will soon    be using RMB.

China and Brazil have agreed to trade the equivalent of up to $30 billion per year in their own currencies, moving to take almost half of their exchanges out of the dollar zone.

The three-year swap line agreement, signed before the start of a BRICS nations summit in South Africa, marked a step by the two largest economies in the group to change global trade flows long dominated by the US and Europe.

Brazil, Russia, India, China and South Africa represent together a fifth of global GDP but have struggled to convert their weight into political clout in the international arena.

English: The BRICS - Brazil, Russia, India, Ch...

English: The BRICS – Brazil, Russia, India, China and South Africa. Português: As Potências regionais. (Photo credit: Wikipedia)

The internationalization of the RMB did not stop its process over Christmas, with its supporters receiving a gift -a Sino-Japan currency swap agreement. The deal was signed during a state visit by Japan’s Prime Minister Yoshihiko Noda to China. According to the agreement, the two countries will cooperate in the use of RMB and yen in cross-border trading, supporting and developing the RMB-yen direct trading markets as well as supporting the healthy development of the RMB-yen bond markets. This marks the latest progress in the internationalization of RMB after China recently signed 70 billion yuan and 10 billion yuan worth of currency swap deals with Thailand and Pakistan, respectively.

Amid the Asian financial crisis in the late 20th century, the Chinese government implemented a stable exchange rate policy, making the RMB widely accepted in the region. At the same time, due to China’s strong economic growth and international payments imbalances, the RMB has attracted great attention from the international community. The internationalization of the RMB became China’s official strategy after the sub-prime crisis. Authorities hoped that through this strategy the country could reform the international financial system, allowing China to enjoy the benefits of international trade and investment.

BEIJING — China and Japan have agreed to start direct trading of their currencies, officials announced during a visit here on Monday by Japan’s prime minister, Yoshihiko Noda.       

Japan will also apply to buy Chinese bonds next year, allowing it to accumulate more renminbi in its foreign-exchange reserves. The moves were among several that emerged from Mr. Noda’s meetings with President Hu Jintao, which focused on how the two nations could work together to maintain peace on the Korean peninsula.       

China is the world’s second-largest economy while Japan is the third largest, and the currency agreement is part of a move away from using dollars. Chinese officials have said recently they would like to broaden the global use of the renminbi, also known as the yuan, and want to see more countries move away from relying on dollars as the worldwide currency.       

They hold the world’s largest foreign-currency reserves — China has about $3.2 trillion, while Japan holds $1.3 trillion — and any moves to reconstitute the makeup of those holdings could change the global currency map.

BRASÍLIA, BRAZIL – Wary of dependence on the dollar, Brazil and China on Thursday agreed to a R$60 billion currency swap, shoring up their economies and increasing liquidity in the wake of continued instability in Europe and the United States.

“It is a measure that reinforces the economies of both countries,” Brazil’s Minister of Finance Guido Mantega said in a statement. “It is as if we had a reserve of additional resources for times when the international economy is stressed.”

Under the initiative China will be able to access up to R$60 billion from the Brazilian Central Bank for bilateral trade, or to bolster reserves as needed. Brazil will have equal access to 190 billion yuan from China.

The initiative was discussed by BRICS nations at last week’s G-20 summit in Los Cabos, Mexico. It is designed to strengthen ties between the group, which has been lobbying for greater influence at the international table, and to enable them to better withstand the global economic crisis.

China Takes a Small Step Away from the Dollar

By Neel Chowdhury / Singapore  Monday, Apr. 06, 2009

The most effective weapons are often the ones never used. Just ask French President Nicolas Sarkozy. In advance of the G-20 summit held in London last week, Sarkozy threatened to storm out of the talks if hedge funds weren’t put on a tight leash as part of efforts to cope with the global financial crisis. Leaders agreed to regulate hedge funds more tightly — and Sarkozy remained in his chair.

Now it is China’s turn to show it’s no pushover. In the G-20 run-up, Zhou Xiaochuan, China’s central bank governor, published a paper suggesting that alternative global currencies, like Special Drawing Rights — a unit of exchange used by the International Monetary Fund — be considered to replace the U.S. dollar as the world’s de facto reserve currency. While some Washington officials rejected the proposal as impractical, China’s leaders have been taking steps to show just how nervous they are about a weaker dollar as the U.S. runs up massive deficits to shore up its crumbling economy and financial system. In the past two weeks, China signed multibillion-dollar currency-swap agreements with Indonesia and Argentina that effectively allow Beijing’s two trading partners to bypass the dollar as a medium of exchange. The deals followed similar swaps China has hammered out over the past six months with Malaysia, Hong Kong and South Korea. The combined value of the various swaps — which enable the central banks of China’s trading partners to sell yuan to local importers to buy Chinese goods — is nearly $100 billion. (See pictures of the global financial crisis.)

The agreements are an unusual step for China, which has historically used U.S.  dollars to conduct its external trade. But with some 70% of its $2 trillion in  foreign reserves parked in the U.S. currency, China is searching for ways to  diversify. Beijing’s main concern is that the dollar will inevitably weaken,  eroding the value of its holdings, due to the growing U.S. budget deficit that  is expected to swell to more than $1.75 trillion in 2009, the country’s largest  debt load as a percentage of GDP since World War II. “This is the tip of the  iceberg,” warns Joseph Tan, the chief Asia economist for private banking at  Credit Suisse. “It doesn’t look promising for the dollar.” (Read “How China Is Capitalizing on the Economic Crisis.”)

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Written by voiceoftruthusa

October 12, 2013 at 5:47 am

Posted in Uncategorized

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