Currency Wars: China’s Yuan Vs the US Dollar

US Dollar vs. Chinese Yuan
[courtesy Google Images]

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“The yuan has overtaken the euro as the second most used currency in international trade finance, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

“The share of the Chinese currency’s usage in trade finance, such as Letters of Credit and Collections, grew to 8.7 percent in October, from 1.9 percent in January 2012, data from the transaction services organization showed.”

Note that the yuan’s share of the global trade rose from 1.9% to 8.7% in less than 2 years. That’s an average increase of over 3% per year.

“It now ranks behind the U.S. dollar, which remains the leading currency with a share of 81.1 percent.

“The euro’s share, meanwhile, dropped to 6.6 percent in October, from 7.9 in January 2012, and is now in third place.”

The yuan’s rise to the #2 currency in international trade is an important, but largely overlooked, story.

If the yuan continues to grow at the rate of 3% per year, the US$ and Chinese yuan would be equal in terms of usage by 2025—12 years from now. If the yuan’s rate of growth accelerates—and it probably will—the yuan and fiat dollar will reach parity much sooner.

For example, if the use of Chinese yuan increased by 5% a year (instead of 3%), we could expect a dollar/yuan parity by 2020—just 7 years from now.

Why might that parity be important?

Because we can wonder how long the fiat dollar will retain its position as “world reserve currency” if the Chinese yuan becomes more commonly used. If the fiat Chinese yuan provides a viable alternative to the fiat dollar, I suspect that a lot of nations who are sick of US monetary exploitation will be happy and eager to shift from US dollars to Chinese yuan.

And if China ever provides a currency backed by gold, the flight from fiat dollars into Chinese gold-backed yuan would be almost instantaneous.

The fact that we even see a mainstream media article comparing the growing use of Chinese yuan to the use of US$ is evidence that a change is taking place that’s likely to accelerate over the next several years.

“The top five countries using the renminbi (RMB) for trade finance in October were China, Hong Kong, Singapore, Germany and Australia.”

There’s no surprise that Asian countries like China, Hong Kong, and Singapore use China’s currency to settle their international trade. And, given that Australia is geographically close to China, it’s not so surprising that Australia is one of the top five countries using Chinese currency.

But it is surprising to learn that Germany—the most important economic and political power in the EU—is also one of the top five countries using China’s currency. Insofar as Germany uses Chinese currency to settle foreign trade accounts, we can expect the rest of the EU nations to soon follow suit.

“According to a poll by HSBC . . . , a quarter of 700 global businesses surveyed said they expect to start using the currency in trade settlements within the next five years.

“The bank expects the yuan to account for 30 percent of China’s external trade settlement by 2015, up from 12 percent at the end of 2012, ultimately paving the way for full yuan convertibility.”

An increase in the use of the yuan in China’s external trade is not the same thing as an increase in global use of the yuan. Thus, it’s possible that the Chinese yuan might double in Chinese foreign trade by A.D. 2015, but still reflect only 10% or 12% of global trade.

But, if it were true that use of Chinese yuan in Chinese trade increased from 12% “at the end of 2012” (which corresponds to the beginning of 2013) to 30% “by 2015” (which corresponds to the end of A.D. 2014), then we can see that the use of Chinese yuan in Chinese trade is predicted to increase from 12% to 30% in two years. That’s an average annual increase of 9% per year.

If that same rate of growth for Chinese foreign trade also applied to global use of the yuan—and it could—we could expect use of the yuan to reach parity with that of the dollar in just 4 years.

Although no one knows for sure that the use of the yuan will continue to grow, or how fast it might grow, that usage is likely to grow and can reasonably be expected to reach parity with the fiat dollar within 3 to 5 years.

Once that 50/50 parity is reached, the fiat dollar will probably lose its status as world reserve currency.

More, it’s unclear whether the Chinese yuan must actually reach a 50/50 parity with the fiat dollar before the dollar loses its status as world reserve currency. The psychological impact of the Chinese yuan being used in just 25% to 35% of global trade might enough to terminate the fiat dollar’s status as world reserve currency. That could happen in as little as two years.

Once the world reserve currency status is kist, the dollar’s value might fall precipitously and the dollar might even collapse. Conversely, the price of gold in US dollars should skyrocket.

• I’m guessing that prior to A.D. 1999 (when the euro was first introduced into global trade), the fiat dollar was used in roughly 98% of all international trade transactions. If so, use of fiat dollar has fallen from 98% to 81% in just the past 14 years.  That’s a little over 1% per year.  Doesn’t seem like much.

Therefore, some people might naturally assume that the “little” Chinese yuan (currently used in just 8% of international trade) would still never rise to match the level of the (current) 81% fiat dollar. After all, the yuan is just another fiat currency, with no more intrinsic value that the fiat dollar.

But Chinese fiat currency has one enormous advantage over US fiat dollars: China has the world’s largest stockpile of monetary reserves while the US is the world’s biggest debtor. If you must transact in a fiat currency, which would you prefer to use?  That of a nation whose wealth is positive and growing at a remarkable pace, or that of a nation that’s not merely going deeper into debt, but which is already technically bankrupt?

• When the dollar’s status as world reserve currency might actually be lost remains to be seen. But China’s gains on the dollar in global trade suggest that the “world reserve currency” status won’t last for more than five more years, and might be lost in as little as two.

That guesstimate gives us a timeline on which we might reasonably predict when the value of the fiat dollar will crash and the price of gold, at the latest, will skyrocket.  It could be as little as two years.  The transition probably won’t last over five years.  

If other, intervening events come into play, the transition may be accelerated.

I’d bet that the the dollar loses its exclusive status as world reserve currency status within two years.  If I’m right, and if you can hold your gold for another 700 days, you may find you wealth increased dramatically.