China and Japan have taken the first step in abandoning the dollar. I have been waiting for this for years. Now it has happened.
Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said over the holiday weekend.
Here is why this is important.
China is Japan’s biggest trading partner with $340 billion in two-way transactions last year. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as global, financial markets remain volatile and decaying. It marks a major leap forward of the internationalization of the Chinese currency, a step that has been developing for the last few years, from tiny beginnings. It signals that the Chinese banking system has developed to the stage where they can handle international transactions of note. The development of the banking system is clearly far advanced, so expect the enlargement of the international Yuan market to pause, as this leap in size settles in and any teething problems eliminated.
China is actively pursuing more business in southeast Asia.
China also announced a 70 billion yuan ($11 billion) currency swap agreement with Thailand last week as part of a plan outlined in October to promote the use of the yuan in the Association of Southeast Asia Nations and establish free trade zones. Central banks from Thailand to Nigeria plan to start buying yuan assets as the global Yuan market continues to be developed quickly.
The article assures us: “It would be wrong to see these moves as purposely attacking the dollar.” Nonsense. China is beginning to bail out of the dollar.
The article assures us:
China’s motive is as simple as the world has seen new world power gain strength. We’re witnessing the post-initial steps of the growth of a Chinese empire, encompassing its Asian trading partners and bringing them into a new Asian Yuan currency bloc.
Exactly. This means bailing out of the dollar.
The article goes on: “This is a financial war, involving, not lives but livelihoods, and China is winning every step of the way.” Exactly. China is positioning the yuan as the replacement world reserve currency. This will take years. It will take open capital markets. The Communist government does not want to pay this price. But the government is taking the first steps.
The financial world may belittle the present moves as still very small in money terms in a global context, but structurally the move should make the developed financial world jump to attention.
As time passes the process of the internationalization of the Yuan will primarily be at the expense of the dollar. At some point in this process, the rise of the Yuan and the fall of the dollar from its throne will become visible on foreign exchanges and in the financial picture inside the U.S.A. and Europe. At best, we’ll see the Yuan join the world’s current leading currencies in global trade, but rising in the future to potentially the prime global, reserve currency at worst.
But this process could take more than five years or less if the Chinese government pushes it hard.
The consequential pressures on the global currency system, which presently is dependent on the U.S. dollar for its credibility, will undermine the entire global monetary system. When control of the monetary system was entirely in the hands of the developed world, both sides of the Atlantic, gold could be side-lined. But with this new Chinese empire, the new currency bloc has divergent interests from the developed world.
The dollar is king of the hill today. It will be prince of the hill in five years.
Let us not ignore the yen, either. China is saying: “We trust the yen.”
Japan is also beginning to escape from the dollar. It sees the handwriting on the wall. China is going to increase its regional influence. Japan is preparing to bail out of the dollar.