Yuan Kills Dollars

*****China makes Yuan an international currency*****
by Eric deCarbonnel


China makes yuan an international currency! This is a HUGE development which is VERY bearish for the dollar. Below are three articles on the subject.

(emphasis mine) [my comment]

Article from xinhuanet.com:

Commerce minister: China not to promote export through currency depreciation
www.chinaview.cn 2008-12-24 14:02:32

BEIJING, Dec. 24 (Xinhua) -- China will not hinge upon depreciation of its currency, renminbi, to expand exports, according to Commerce Minister Chen Deming. [very, very bad news for the dollar and the US.]

"Given shrinking demand from abroad, the effect of export stimulation through currency depreciation is rather limited," Wednesday's People's Daily quoted Chen as saying.

"Recently, some countries depreciated their currencies but failed to reverse the downward trend of their foreign sales through such moves," he told the paper. [He is talking about South Korea whose currency fell by a third against the dollar this year. South Korea's exports are down 18%.]

China hoped that all nations would make joint efforts and enhance coordination to keep international foreign exchange markets stable, Chen said. [He is implying here that something might happen to make the foreign exchange markets unstable (dollar collapse)]

article from AFP:

China to try using yuan as settlement currency in some foreign deals: report
15 hours ago

BEIJING (AFP) — China will use the yuan in transactions with neighbouring economies on a trial basis, state media said Thursday, calling it a potential first step to making it an international currency.
…
The initiative emerged from a meeting Wednesday of the State Council, or cabinet, but no details were available on when it would be implemented, according to the paper.

"The move will... increase the yuan's acceptance in Asia, which will help it become an international currency in the long run," Zhao Xijun, a finance professor at the People's University in Beijing, told the paper.

The vast majority of China's foreign trade deals are currently settled either in euros or US dollars.
…
Central bank governor Zhou Xiaochuan warned earlier this month that settlements using the US dollar would be problematic if the dollar's value fluctuated drastically.

There has been growing pressure over the past year within China to make the yuan an international currency, but the government has so far been cautious as it would require making it fully convertible, the paper said.

The yuan is not yet convertible on the capital account, meaning funds cannot freely enter the country for purposes such as investment in stock or real estate.

The Chinese government is concerned that liberalising this type of fund flow would make the economy more vulnerable during times of regional or global turmoil.

Another article from xinhuanet.com:

Senior official: Renminbi likely to be used as currency for forex reserves
www.chinaview.cn 2008-12-25 17:01:12

BEIJING, Dec. 25 (Xinhua) -- China's currency, Renminbi, is likely to join other international currencies to be used for forex reserves by other economies, according to Wu Xiaoling, former vice governor of the country's central bank and now the deputy head of the financial and economic committee under the top legislature.

Wu made the remarks in her article carried by the latest annual issue of the leading business magazine Caijing.

Wu wrote that China should make preparations in its economic structure and its financial regime for its currency to be internationalized.

Prior to making the Renminbi, also called yuan, a currency used for forex reserves by other economies, it may be allowed to be used for trade settlements between China and some other countries and regions, according to Wu.

In China's neighboring countries, there were calls for the yuan to be used to settle bilateral trade payments, she said. China has signed settlement agreements with eight neighboring countries, including Russia, Mongolia, Vietnam and Myanmar, assuming a voluntarily choice of settlement currency, she added.

Many were confident of the yuan and willing to settle trade payments in the Chinese currency, as it remained strong, Wu said.

"China should create conditions for the yuan to become an international settlement currency," she stressed.
…

The Chinese Government has decided to allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta and the special administrative regions of Hong Kong and Macao.

Meanwhile, Guangxi Zhuang Autonomous Region and Yunnan Province will be allowed to use Renminbi to settle trade payments with ASEAN (Association of Southeast Asian Nations) members, according to a government announcement on Wednesday evening.

But the Government did not give any details of how and when the pilot currency program would start.

"The move will mitigate the risk of exchange rate fluctuations for Chinese exporters and their trade partners," Zhao Xijun, finance processor at Renmin University of China, was quoted as saying by Thursday's China Daily.



My reaction: Wow.


First, the big news items:

1) China has announced its intentions to make the yuan an international currency.

2) China not to promote export through currency depreciation.

3) China has signed settlement agreements with eight neighboring countries, including Russia, Mongolia, Vietnam and Myanmar, assuming a voluntarily choice of settlement currency.

4) Soon, foreign central will likely be able to use the yuan for forex reserves.

5) China is worried about a possible dollar devaluation


My comments on the story:

1) These announcement was made on Charismas to avoid tanking the dollar.

2) If yuan becomes an international currency, there will a massive migration by central banks from dollar reserves into yuans, because the China's fundamentals are so strong compared to the US.

3) China's announcement that they will not " promote export through currency depreciation" means Chinese financing of our trade deficit is about to come to a very nasty end.

4) From the articles I have read, it is apparent that Chinese exporters are screaming at their government to internationallize its currency so they can bill in yuan instead foreign currencies. Their desire is completely understandable. After all, how would you like to be paid in monopoly money (US dollar)?

5) If the yuan is allowed to compete freely with the dollar, our currency will get crushed.


Again, wow. I have been predicting that China would drop its dollar peg, but now it is actually happening...