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What Could Dethrone the Dollar as Top Reserve Currency?

March 31, 2018

What Could Dethrone the Dollar as Top Reserve Currency?

Central banks seem leery about the Chinese yuan.

What will finally pull the rug out from under the dollar’s hegemony? The euro? The Chinese yuan? Cryptocurrencies? The Greek drachma? Whatever it will be, and however fervently the death-of-the-dollar folks might wish for it, it’s not happening at the moment, according to the most recent data.

The IMF just released its report, Currency Composition of Official Foreign Exchange Reserves (COFER) for the fourth quarter 2017. It should be said that the IMF is very economical with what it discloses. The COFER data for the individual countries – the total level of their reserve currencies and what currencies they hold – is “strictly confidential.” But we get to look at the global allocation by currency.

In Q4 2017, total global foreign exchange reserves, including all currencies, rose 6.6% year-over-year, or by $709 billion, to $11.42 trillion, right in the range of the past three years (from $10.7 trillion in Q4 2016 to $11.8 trillion in Q3, 2014). For reporting purposes, the IMF converts all currency balances into dollars.

Dollar-denominated assets among foreign exchange reserves rose 14% year-over-year in Q4 to $6.28 trillion, and are up 42% from Q4 2014. There is no indication that global central banks have lost interest in the dollar; on the contrary:

Over the decades, there have been some efforts to topple the dollar’s hegemony as a global reserve currency, which it has maintained since World War II. The creation of the euro was the most successful such effort. Back in the day, the euro was supposed to reach “parity” with the dollar on the hegemony scale. And it edged up for a while until the euro debt crisis derailed those dreams.

And now there’s the ballyhooed Chinese yuan. Effective October 1, 2016, the IMF added it to its currency basket, the Special Drawing Rights (SDR). This anointed the yuan as a global reserve currency.

…click on the above link to read the rest of the article…

Forget the Yuan: King Dollar is Here to Stay

February 27, 2018

Many believe deficit spending will kill the US dollar as a reserve currency and the yuan will take over. They are wrong.

Economist Daniel Lacalle asks Can China Really Kill The US Dollar Supremacy?

>Why China Will Fail to Dethrone the US Dollar

First, because it wants the world to widely accept the Yuan while maintaining monetary repression via capital controls. As the British say, they want to “bake the cake and eat it.” What kind of global reserve can be created when capital controls are imposed? None. No economic agent will accept it.

Second, because most economic agents are aware that the huge imbalances of the Chinese economy will likely be disguised with a huge devaluation. The average of estimates assumes between an 18% and a 20% additional devaluation against its main trading currencies in the next five years. The more this inevitable correction is delayed, the less the possibility of reinforcing the credibility of the yuan as a world reserve currency.

Third, the financial balance is against them. The reason why China maintains completely obsolete capital controls is that domestic economic agents, as soon as markets open, do everything possible to get rid of their yuan in the face of the evidence of a huge devaluation. That is why China has lost almost one-third of its reserves in foreign currency in a few years.

The only way in which China and Russia could pose a threat to the US dollar would be to defend sound money and end the disastrous monetary policy that governments are conducting. A commitment to a return to a gold standard and avoid massive money supply increases. However, that does not seem to be the case, rather to spread China’s monetary imbalances to the rest of the world.

 

…click on the above link to read the rest of the article…

A “Death Spiral” for the Chinese Yuan?

January 29, 2016

A “Death Spiral” for the Chinese Yuan?

The “impossible trinity.”

The authorities in China are in a desperate juggling act, trying to keep a growing number of rotting oranges, porcelain plates, burning torches, and explosives in the air all at the same time. But it’s not working very well anymore.

Thursday morning, the People’s Bank of China injected 340 billion yuan ($51.9 billion) into commercial banks via reverse repurchase agreements, after having already injected 440 billion yuan on Tuesday. As 190 million yuan of prior reverse repurchase agreements – a type of short-term loan – have matured, the net injection of cash this week amounted to 590 billion yuan, or $89.7 billion, the most, according to the Wall Street Journal, since February 2013.

If the purpose was to prop up confidence in stocks, it worked only for about an hour then failed miserably. The Shanghai Composite Index plunged 2.9% on Thursday, to 2656, the lowest since November 2014. The Shenzhen Composite plunged 4.2%, the ChiNext 4.6%. The Shanghai Composite is now down 13% since Monday morning and 49% since last June.

Part of this ongoing massive cash injection is in preparation for the Chinese New Year holiday starting February 7. And part of it is to keep everything afloat in a sea of liquidity, even as this liquidity is draining out the back in unprecedented quantities.

To fight the effects of capital flight, China has been selling down its vaunted foreign exchange reserves, which plunged by $108 billion in December, the largest decline ever. For the year, they fell $510 billion, or 13%, to $3.3 trillion, the lowest since November 2012. Money is fleeing China [read…. What Will China Dump Next, After Treasuries, to Keep Control?]

Much of this money is landing in the US. For example, plans have now emerged for a Chinese company, using Chinese money, to build a development in San Francisco that consists of two towers – including the second-highest in the city, behind the under-construction Salesforce Tower – and some other buildings, which are all part of a dizzying building boom here.

…click on the above link to read the rest of the article…

IMF’s Lagarde Anoints Chinese Yuan. Will it Now Demolish the “Dollar Hegemony?”

November 15, 2015

IMF’s Lagarde Anoints Chinese Yuan. Will it Now Demolish the “Dollar Hegemony?”

IMF boss Christine Lagarde is gung-ho about it. IMF staff is too. The Executive Board will consider it on November 30 and in all likelihood approve it. It will take effect in October 2016. Then it’s a done deal: the Chinese yuan will be added to the IMF’s currency basket, the Special Drawing Rights (SDR). A step toward becoming a major global reserve currency.

IMF staff had determined that the yuan meets the requirements of being a “freely usable” currency, Lagarde said in a statement, so a currency that is “‘widely used’ for international transactions and ‘widely traded’ in the principal foreign exchange markets.”

China also overcame other hurdles the IMF had put before it, after numerous reforms to liberalize its currency and credit markets and offer more transparency. The IMF’s Executive Board has the final say, but Lagarde will chair the meeting. And the rubber stamps are lined up on the conference room table.

Some countries, including France and Britain, have already expressed support for the change. According to Reuters, a Treasury spokesperson said the US government has always backed the yuan’s inclusion if it met the IMF’s criteria, and would “review the IMF’s paper in that light.”

The yuan has arrived – at the elite club for the biggest currency warriors: the dollar, the yen, the euro, and the pound.

China has long sought to give its currency more global weight, both as payments currency and ultimately as reserve currency, given the enormous size of its economy. By being included in the SDR, the yuan moves a big step closer, becoming more palatable for central banks to add to their foreign exchange reserves.

Currency analysts peg central-bank demand for the yuan at over $500 billion, according to Reuters. But global foreign exchange reserves have been shrinking since last year, as this chart by NBF Economics and Strategy shows:

Global-foreign-exchange-holdings-q2-2015

…click on the above link to read the rest of the article…

China chooses her weapons

August 23, 2015

China chooses her weapons

China’s recent mini-devaluations had less to do with her mounting economic challenges, and more to do with a statement from the IMF on 4 August, that it was proposing to defer the decision to include the yuan in the SDR until next October.

The IMF’s excuse was to avoid changes at the calendar year-end and to allow users of the SDR time to “adjust to a potential changed basket composition”. It was a poor explanation that was hardly credible, given that SDR users have already had five years to prepare; but the decision confirming the delay was finally released by the IMF in a statement on Wednesday 19th.

One cannot blame China for taking the view that these are delaying tactics designed to keep the yuan out, and if so suspicion falls squarely on the US as instigators. America has most to lose, because if the yuan is accepted in the SDR the dollar’s future hegemony will be compromised, and everyone knows it. The final decision as to whether the yuan will be included is not due to be taken until later this year, so China still has time to persuade, by any means at her disposal, all the IMF members to agree to include the yuan in the SDR as originally proposed, even if its inclusion is temporarily deferred.

China was first rejected in this quest in 2010 and since then has worked hard to address the deficiencies raised at that time by the IMF’s executive board. That is the background to China’s new currency policy and what also looks like becoming frequent updates on her gold reserves. It bears repeating that these moves had little to do with her domestic economic conditions, for the following reasons:

…click on the above link to read the rest of the article…

 

Riskiest End of the Junk Bond Market Just Blew Up

August 16, 2015

Riskiest End of the Junk Bond Market Just Blew Up

You wouldn’t know by looking at the US Treasury market, which remained relatively sanguine this week, with only a little panic buying on Tuesday. So 10-year Treasuries ended the week near where they’d started it. But at the other end of the spectrum, the riskiest portion of the junk bond market just blew up spectacularly.

There were a lot of culprits to catch the blame. At the top of the list was the devaluation of the Chinese yuan. It caught the corporate bond markets by surprise, though it shouldn’t have, injected all kinds of stress into them, and drove up bond spreads, with investors demanding a higher yields for riskier bonds. It hit the riskiest segment of the junk bond market with a sledge hammer.

Given the precarious state of the current credit bubble and the pandemic nervousness about it, bond investors were rattled by the moves of the People’s Bank of China. In prior crises, such as the 1997 Asian financial crisis and the 2008-2009 Global Financial Crisis, the PBOC had maintained a fixed exchange rate with the dollar. It didn’t devalue, as other countries were doing, to get out of the crisis. The yuan was seen as stabilizing the markets. Now the yuan is seen as destabilizing the markets.

It didn’t help that the Fed’s cacophony has been pointing at a September rate hike. It would be the first ever in the careers of millennials working on Wall Street. It would bring to an end the 30-year bull market in bonds. Even most middle-aged money managers have not yet experienced the alternative, other than a few short-lived dips and panics. On a visceral level, they simply can’t believe rates can ever rise over the long term. To them, rates can only go down.

 

…click on the above link to read the rest of the article…

The US-China “Currency War”: Winners and Losers

August 13, 2015

The US-China “Currency War”: Winners and Losers

American politicians aren’t congratulating the Communist Party in Beijing for its success in following the capitalist proverb “enrich yourself,” but screaming foul play: China falsifies the exchange rate of the yuan so that it can make more money off the USA than vice versa. The accusation, made by everybody from Donald Trump to Bernie Sanders, is that China’s policy is killing good-paying American jobs – and a lot else besides. What’s bad for America can’t be caused by anything done by America, but by Chinese trickery!

America’s right to success

The remedy for the problem is just as obvious as the blame: China must get on board with America’s approved rules for international trade and commerce. If China allows its currency to free-float, then the value of the yuan will adjust, China’s exports to the USA will become more expensive, China and the rest of the world will buy more products from the USA, and jobs will return to the USA.

The assumption is that the global money traders, in their infinite wisdom, would find the “correct” exchange rate between the yuan and the dollar once they have free access to the supply and demand for China’s currency. What would the correct exchange rate be? One that guarantees the success of US firms.

 

Before this week’s turnaround in response to its slump, China had been moving towards free market convertibility of the yuan. Since 2005, it had allowed its currency to gain almost 30 percent in relation to the dollar, while trying to moderate its increase. Yet the results for the trade balance with the US were exactly the same. What was inferred from this? China hadn’t gone far enough. So how will we know when it’s gone far enough? When America is the winner.

…click on the above link to read the rest of the article…

China To Launch Yuan Swap Trading With Russian Rubles On Monday | Zero Hedge

December 26, 2014

China To Launch Yuan Swap Trading With Russian Rubles On Monday | Zero Hedge.

The world was slow to wake up to the new reality in which China is now the de facto IMF sovereign backstop, as Zero Hedge described two weeks ago in “China Prepares To Bailout Russia” when we noted that a PBOC swap-line was meant to reduce the role of the US dollar if China and Russia need to help each other overcome a liquidity squeeze, something we first noted over two months ago in “China, Russia Sign CNY150 Billion Local-Currency Swap As Plunging Oil Prices Sting Putin.”

In fact, it was only this week that Bloomberg reported that “China Offers Russia Help With Currency Swap Suggestion.” But in order to fully backstop Russia away from a SWIFT-world in which the dollar reigns supreme, one extra step was necessary: the launching of direct FX trade involving the Russian and Chinese currencies, either spot or forward – a move away from purely theoretical bilateral FX trade agreements – which would not only enable and make direct currency trading more efficient by sidestepping the dollar entirely, but also allow Russian companies to budget in Chinese Yuan terms. It is no surprise then that this is precisely the missing step that was announced overnight, and will be implemented starting Monday.

From Bloomberg:

…click on the above link to read the rest of the article…

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