China Pulls the Plug on the US Dollar
Things are moving fast in China.
The Chinese government is rushing to implement a series of changes to its currency before the coming global monetary reset.
This reset has the US dollar firmly in the crosshairs.
Once in play, it will signal the end of the Bretton Woods agreement that has defined the global monetary system for 75 years. And with it the end of the US dollar as the world’s sole reserve currency. National currencies won’t disappear, but the US dollar’s hegemony will.
Providing liquidity in its place will be the International Monetary Fund’s Special Drawing Right, which has been earmarked to replace the dollar as reserve currency. The SDR is simply an international reserve asset created to supplement member countries’ official reserves.
Over the past fortnight, we’ve seen two developments from China that suggest we may be less than five years away from this reset.
We reported last week on China’s launching of oil futures contracts. Rightly, this was interpreted as an important step in the internationalisation of the yuan.
Yet it was merely an appetiser for what came next…
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The real reason China wants to trade oil in yuan
China announced a pilot program beginning later this year to purchase imported oil in yuan. It wants to create a benchmark equal to Brent and West Texas Intermediate. It also wants to reduce its dependency on the US dollar in oil trade.
Yet this move was only partly about China weaning itself of US-dollar dependency.
After all, the yuan is not going to replace the US dollar as the reserve currency on its own. That isn’t China’s intention anyway. Not least because the yuan has a massive liquidity problem.
An estimated 90% of transactions in currency markets involve the use of the US dollar. Compared to 4% for the yuan, the gap is too vast for any serious challenge to the dollar’s dominance.
Rather, the push to allow oil trading in yuan is meant to boost the international use and appeal of China’s currency. This is unfolding now because China realises that the next monetary crisis is around the corner.
You’d think China’s moves towards de-dollarisation would alarm the US. After all, the US benefits greatly from the dollar’s reserve currency status. Yet it’s not.
The IMF provides the biggest clue.
The yuan was admitted to the IMF’s Special Drawing Right basket in 2016.
This basket is made up of only five currencies. It includes the US dollar, euro, yen, pound, and yuan.
The basket is broken down by weightings. The US dollar weighting is 42.73%. The euro, at 31.93%, sits in second place. The yuan, at 10.92%, ranks third, and is followed by the yen and sterling.
The weighting is important because it reflects the influence of each currency in global finance.
Which begs the question: Why did the IMF, a US-led institution, accept the yuan’s inclusion in the basket?
A glance at the list criteria for eligibility should raise eyebrows:
- The volume of international payments in the currency;
- The amount of reserves held in that currency;
- An open capital account so the currency is freely convertible to other SDR currencies; and
- Transparency and consistency in meeting IMF accounting and reporting standards.
It’s arguable the yuan fails to meet any of these criteria. And yet it waltzed into the VIP club anyway.
That’s because the yuan’s inclusion had little do with its usage in global finance. It was a political move.
Otherwise, the US, and by extension the IMF, wouldn’t be accommodating the yuan’s internationalisation as it has. And it almost certainly wouldn’t be giving China a leading role in influencing the future of the global monetary system.
So why is it doing exactly that?
The first, which we covered a few weeks ago, can only be understood if you accept that an international banking elite controls global finance.
Seen from this perspective, you’ll realise that undermining the US dollar’s position as reserve currency is a key plank of their policy. Not least because it brings them a step closer to the centralisation of the global financial system, which is the ultimate goal.
The second point, crucial to our argument today, though not unrelated to the first, is that the IMF, and by extension the US, has earmarked China for an important role in the coming reset.
And this is where it concerns you as an investor here in Australia…
China to the rescue
During the next crisis, central banks won’t have any ammunition left to maintain stability. Decades of monetary easing has given them little room to manoeuvre.
The Federal Reserve knows this. That’s why it’s desperately raising rates now, in hope that it’ll have enough room to slash rates to offset the effects of a future crisis.
That’s the theory, anyway.
In fact, the Fed’s monetary tightening is designed to edge us towards a crisis by restricting the amount of debt creation. Cutting the air supply of the only thing that’s kept the world from financial oblivion will see to that.
Yet no amount of rate cutting will be sufficient to stave off a monetary crisis.
We never tire of watching market commentators deride central bankers for their supposed stupidity and lack of foresight.
Yet they’re not stupid. They know what they’re doing. And, importantly for the financiers they takes their cues from, they’re executing their plan to perfection.
Which is where the SDRs come into play.
SDRs will form the bulk of liquidity in the immediate aftermath of the crisis.
However, any widespread issuance of SDRs requires China’s help.
That’s because the usefulness of SDRs extends only as far as they’re able to be swapped for other reserve currencies.
As Jim explained to readers of Strategic Intelligence recently:
‘When your neighbours are in full panic mode, they won’t want SDRs from Citibank; they’ll want dollars. But who will swap dollars for the SDRs printed by the IMF?
‘The answer is China. The PBoC [sic] would love to dump US dollar assets in exchange for SDRs. But there’s a catch. China will engage in SDR/US dollar swaps only if the yuan is included in the SDR. China does not want to pay club dues unless it’s a member of the club.’
You can see why the US has no reservations about the yuan’s inclusion in the SDR basket.
The issuance of trillion in SDRs during the next reset will allow China to dump US dollars in exchange for SDRs.
That explains why the US needs China’s help. For the US, it’s either that or the prospect of hyperinflation and panic on the streets unlike anything seen before in its history.
As this takes place, the US dollar will lose its global reserve currency status. It will become no more important than the euro or yuan.
With significant hoardings of both SDRs and gold, the yuan will see its importance in global finance surge.
That’s not to say the US dollar will die. It won’t. And most currencies, despite the prospect of severe inflation, aren’t likely to disappear either. But the SDRs, with a weighting balanced to ensure that no one currency dominates, will take on a greater role in the monetary system.
China’s moves to internationalise the yuan through oil markets should be seen in this context then. The Chinese are laying the necessary foundations in order for the next monetary reset to commence.
It is no different to the arms build-up that precedes major wars. Every actor has to learn their lines before the show begins.
This monetary reset could arrive at any point in the next five years. And almost certainly within the next eight years.
The only ‘currency’ that will retain its purchasing power through this upheaval — because it never truly loses it — will be gold.
Until next week.
For The Daily Reckoning Australia