China eagerly takes a bite out of USD’s Reserve Status

Published on Author kloster



Article: China and Australia have now agreed to direct currency conversion without the USD as an intermediary. Given the amount of exports now being traded amongst the two countries, direct conversion will save thousands of business money who deal with China.

2 Responses to China eagerly takes a bite out of USD’s Reserve Status

  1. Very interesting indeed. Not to say this is a huge step in the direction of Chinese currency becoming the world reserve currency, but it definitely makes you think. I read a book last summer called Currency Wars, where the author (James Rickards) talks about this possibility. In it, he discusses the events that would transpire in order for that to happen, and the power that China would then have. His fear, that China and Russia could band together and launch a currency war against the dollar seems like an offshoot if not unrealistic, but it is very interesting to think about.

  2. We have to be careful about distinguishing between direct trading of currencies and a currency having “reserve” status. In terms of direct trading, that will arise whenever the volume is big enough, except when there are foreign exchange controls – which is the case for China. So direct trading requires the OK of Chinese financial authorities to allow banks to hold A$ (presumably in Shanghai) and for Australians to hold trading accounts in Shanghai that don’t require transaction-by-transaction authorization.

    That however doesn’t mean that central banks will want to hold large RMB balances. Indeed, as long as China runs trade surpluses, there’s no natural way for non-residents to build up large reserves of the yuan [RMB, 元,块). Furthermore, China has no bond market, so unless people want to hold bank deposits, there’s no way to stay liquid – and bank deposits may not be guaranteed when large in size (think Cyprus!) whereas outsiders might have more confidence in Treasuries. Finally, there’s no reason to switch. Dollars work fine, over a trillion dollars a day change hands in our bond market, we have low inflation, and you can readily buy any currency. Plus dollar-based markets operate more-or-less 24/7, as the trading day shifts from NY to Tokyo to Singapore to Dubai to London. China doesn’t have that.

    So yes, you might get a fractionally better rate and/or lower fees with direct A$/RMB trades. If you’re working in A$billions of iron ore, that adds up pretty quick. But it’s not “reserve status”.