As the Western world enjoyed their Christmas holidays, news broke in Asia of something that was reported in the media but received very little attention.
History may treat this event as something all together of much larger importance than is currently understood. Future Americans will ask why the U.S government could not see the writing on the wall? That is, tools are being put in place that will end the global dollar-based ecosystem.
Asian Nations Start Currency Reforms to End their Use of Dollars
On December 25, 2011 it was reported that the world’s second and third largest economies will open currency swap lines in a move to side-step the U.S dollar and conduct trade in their own currencies. In a meeting between Japanese Prime Minister Yoshihiko Noda and Chinese Premier Wen Jianbao they officially announced their governments' intentions to conduct bilateral trade in yuan-yen without using U.S. dollars. The Japanese government said direct yen-yuan settlement should reduce currency risks and trading costs. Japan also announced it will start buying Renminbi bonds to hold as a reserve currency.
China and Japan, long time adversaries who disagree on most issues with regards to foreign policy can agree on one thing…to stop using dollars. Japan also topped off a busy week by signing a currency swap agreement with India with the same stated goal of moving bilateral trade between the two countries out of the USD.
Chinese Yuan Continues Toward Convertibility
James Rickards in his fantastic new book, Currency Wars, writes that the next currency war will be fought between the Dollar and Yuan.
At the China Money Report, we believe that the Chinese Renminbi will become the only major competitor to the U.S. Dollar. China is now the world’s largest trading nation and the world’s largest creditor. The IMF predicts that the Chinese economy will surpass the U.S. by 2016.
We believe the world highly underestimates Chinese economic power and that the Chinese economy is actually already much larger than the U.S. economy. The U.S. has a $15 Trillion GDP where as China’s GDP just passed $7.5 Trillion in 2011. This would mean according to standard GDP calculations that the U.S. economy is twice as large as China’s. Yet, China produces 10 times the amount of steel that the U.S. produces. China produced 20 million cars in 2011 with a market heading toward 35 million per annum. In 2011, the U.S. sold 12 million vehicles but only actually produced 7 million vehicles domestically. Virtually everything an American buys is made in China. The Chinese computer, cell phones, and luxury goods markets are now multiples of the size of the U.S.
This raw economic power wielded by China will bring the Chinese Yuan to global reserve currency status quicker than anyone can imagine. Recently, the U.S China Economic and Security Commision reported to the U.S. Congress saying, "it is no longer inconceivable that the RMB could mount a challenge to the dollar, perhaps in the next five to ten years."
Central Banks Across the World Scramble for Gold Led by China
Central Banks across the world are buying gold, none more than China.
China is cash rich and gold poor. They know that and are in process of changing that status. China has been doing clandestine gold purchases for years through their banks and sovereign wealth fund but now the numbers and speed of purchases will start to shock. In October of 2011, gold imports into China through Hong Kong grew 484%. November numbers just released grew 20% on top of that.
Recently in Beijing, Zhang Jianhua, director of the research bureau affiliated with the People's Bank of China (PBOC) declared that China should further diversify its foreign-exchange portfolio and make more gold purchases when the metal's price dips. He added, that the Chinese government should not only be cautious of the imported risk caused by rising global inflation, but also further optimize its foreign-exchange portfolio and purchase gold assets when the gold price shows a favorable fluctuation. He also said that gold had become the only "safe haven" for risk-averse investors. "No asset is safe now. The only choice to hedge risks is to hold hard currency - gold.”
How Much Gold Will China Buy?
As of December, China ranked sixth worldwide in gold holdings, with about 1,054 tons, says a report released by the World Gold Council. They have only 1.8% of their reserves in gold. The U.S on the other hand has 77% of its reserves in gold holding more than 8,133 tons. Germany holds 73.7% of its reserves in gold with 3,396 tons.
How much gold might China buy if they are serious in building up their gold reserves? Well, at present they have $3.2 Trillion in foreign currency reserves. Assuming continued growth in their reserves China would need to purchase well over $1 Trillion USD in gold just to get 25% of their reserves into gold by 2020. How much gold will China buy? Try a Trillion with a capital T.
Foreign Countries Move Out of Treasuries with Russia at the Forefront
The final signpost on the end of road for the U.S. Dollar is foreign central banks selling U.S. treasuries. Indeed, we believe the main reason for Federal Reserve buying of treasuries is not to provide stimulus to the economy but to cover up the fact that there are no other buyers outside of the Fed and U.S. commercial institutions who take printed money from the Fed discount window and stuff it back into treasuries. In only a few years the Fed has gone from not participating in this market EVER to becoming the largest holder of U.S. government debt.
In November, China saw its treasury holdings down to $1.13 Trillion, the lowest level in the past 12 months. Russia however, is trying to make an even bolder statement and has dumped its holdings in half over the last 12 months from $176 billion to $80 billion.
Reserve currencies don’t collapse overnight and neither will the dollar. But if people lose confidence in a currency after years and years of debasement and neglect, the end can come with horrifying speed and destruction.