Currencies - Renminbi Currency Swap

in the past six months China has…

 

 

1. Called for a replacement reserve currency
2. Called for the use of SDR’s
3. Signed currency swap agreements with several countries including Argentina. I said that the use of SDR’s was a stalking horse for China’s plan to gain wider acceptance for the renminbi. In turn, that would set the renminbi up for an alternative world reserve currency.

Now, China won’t admit to this, but as the EverBank Big Boss Frank Trotter mentioned yesterday, “China thinks in centuries.”

Well, in this case, I believe China will move faster than that, and faster than most observers think they will. I think this will all take place within the next three years.

Why do I say that? Do you remember when I told you a couple of months ago, that China has “shortened” their Treasury maturities? Yes, China had, under the dark of night, quietly shifted out of long-dated Treasuries, to ones with an average maturity of three years!

At the time, I thought that China just didn’t want 30-year paper. After all, in 30 years, the U.S. fiscal situation could be very dire. In fact, the U.S. economy promises to suffer unless something changes drastically, given the baby boomers and their draw on entitlement programs.

But now it’s possible the Chinese have shortened their maturities to line up with their big plan to gain wider acceptance for the renminbi!

And don’t forget those currency swap agreements they’ve signed with countries in Southeast Asia, and Argentina. (It’s rumored that Brazil is close to signing one too!) As they spread those currency swap agreements around the world, they remove the dollar from the settlement, and replace it with renminbi.

I read a story that was talking about trade, and never put these things together (but that’s okay – I was only reading the story for the data anyway). The story reported that these currency swap agreements could total half of China’s total exports. That’s equal to about $2 Trillion in annual trade flows! If they do that each year, within three years they would have one of the top three currencies in global trade!

And don’t forget the fact that they have effectively removed the dollar from those trade settlements.

Folks, I believe the writing is on the wall here. And yes, the dollar will have its fun from time to time, enjoying rallies. But they will be short-lived, as the die is already cast.

So, what does this mean for us? First of all, this is just my opinion on what’s going on, there are no “guarantees” this will happen this way! So, let’s not run out into the streets shouting doing out best Chicken Little! Let’s just calmly move to the exits, in an orderly fashion if you get my drift.

I’d start by diversifying even a small portion of wealth outside the U.S. dollar.

 

By Chuck Butler - www.worldcurrencywatch.com