Currency Wars: China’s Yuan vs. the US Dollar

10 Dec

US Dollar vs. Chinese Yuan [courtesy Google Images]

US Dollar vs. Chinese Yuan
[courtesy Google Images]

CNBC posted “Yuan overtakes euro as 2nd most used currency in trade finance”. In that article, CNBC reported that,

“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.


Posted by on December 10, 2013 in Currency Wars, Money, US Dollar


Tags: , , , ,

22 responses to “Currency Wars: China’s Yuan vs. the US Dollar

  1. Mike

    December 10, 2013 at 2:13 AM

    What about Silver?

    • Joe L'Amarca

      December 10, 2013 at 4:09 AM


  2. Pat Fields

    December 10, 2013 at 3:39 AM

    Banknotes are not money. They’re Private Intellectual Property of their issuing banks loaned into circulation as ‘Trade Facilitation Instruments’. The below article says about all I could think to say on this ‘reserve currency’ boondoggle.

  3. Martens

    December 10, 2013 at 3:40 AM

    Currency exchange is a very liquid market. That is, it’s quick and easy to buy and sell. You can even do it from home on your computer. Plus, transaction costs are down to almost nothing nowadays.

    Therefore, since the fundamentals appear to be saying the US dollar’s loss is the Chinese yuan’s gain, perhaps buying and holding a nice bundle of yuan would be an ideal way to hedge against inflation in the dollar.

    • Pat Fields

      December 10, 2013 at 4:33 AM

      @Martens … So then, having clear incontestable Title of Ownership in your possessions is of no consideration to you? You have no compunction with incurring Lawful tax liability inherent in all your possessions? Convenience is worth all that in the ‘bargain’?

    • Jetlag

      December 10, 2013 at 2:14 PM


      Let us also recall the large amounts of leverage available when trading currencies.

      If you really believe the yuan is going up and the dollar is going down, you can buy $100,000 worth of yuan with only $2,000 of actual cash, using the margin available in a forex account.

      This way you can protect yourself against the fall of the dollar with only a small up-front investment. And when the yuan does move up big, the leverage you used amplifies your winnings 50 times.

      Of course, such leverage also increases your risk, so this deal is for dollar bears who put their money where their mouth is.

  4. Joe L'Amarca

    December 10, 2013 at 3:59 AM


  5. Peter

    December 10, 2013 at 5:20 AM

    Silver and Gold are in my opinion sitting at rock bottom here, 18 times face on junk may be a bit of a premium here but it may be more of the true price instead of the paper posted price. Silver Eagles for 25 may seem steep. Consider silver at the current price being more of a value in relation to the dollar than it was back in 2000, the same holds true for Gold as well.

    • Pat Fields

      December 10, 2013 at 6:25 AM

      Peter, there had been a modern ‘standard value’ for silver well into the 19th century, dating back to America’s Colonial Period and further. This was an average day’s labor. Research I’d done showed that 5 shillings and later 1 1/4 dollar dollars (both roughly an ounce Troy of fine silver) were the average day’s wage for an average day’s labor.

      In an almost mystical coincidence, the best figure I could determine for total silver ever mined, divided into the current total global population comes to about 7 ounces per person … an ounce for each day of the week. The intrinsic rationality of that figure was quite stunning to me and I still marvel at it.

  6. Peter

    December 10, 2013 at 7:19 AM

    Pat, I marvel at the long term chart of silver going back 500 years, as it has been said, one picture is worth a thousand words. The chart exhibits extreme pessimism as is always evident at market bottoms and/or secular turning points, the al time low of $4.73 in A.D.1992, compared with the all time high in A.D.1477 at $806 roughly. The chart is a historical reflection of supply and demand. In around A.D. 1884 when western silver discoveries the price of silver dropped for approximately 100 years. Due to mismanagement and fraud, mining output is cratering at a time when demand may be at it’s highest in 500 years due to industrial demand and current investment demand.

    In my musings on the “SILVER SUMMIT” a denarius back in the days of the Roman Empire was about equivalent to a dime and represented a days wages for the soldier on average. It may be possible that we get back to that level in the next 500 years or maybe much sooner. So much abuse has been done by way of the printing press and the proclaimed lie of what actual money really is, modern money is not money at all. The lost populous has massive quantities of paper, the vast majority is always wrong at major turning points this time no different. I suspect that mercury dimes being purchased at this time will be wise given the strong move of this 500 year bottom and the true value assigned to all silver denominations will move up nicely from here.

    The move up may be a combination of little or no supply and the gross over supply of debt instruments seeking protection from the global communist movement to debase all currencies worldwide without any restraint whatsoever. The bull market in theft via the printing press is at a major turning point, a climax. This climax for those heavy in paper is going to be most difficult to establish finding silver and gold life rafts on the derelict paper vessels taking major hits.

  7. pop de adam

    December 10, 2013 at 9:02 AM

    I can’t fathom how some people constuct a very convoluted scheme or evade a very simple concept concerning currency particularlly around the issue of currency being an “intellectual property” or even the idea of “commercial paper” over coin. If you accept something from me and I accept anything in return, your claim to it is extinguished, just as my claim is to its’ counterpart in the exchange. People take a literal interpretation to “render unto Ceasar, what is Ceasar’s”, however consider this: If we are speaking to anyone other than Ceasar himself, how could we ever come to possess this coin? Either theft or through trade, If it be theft then this coin is still Ceasars, if it is trade then Ceasar should have no claim to it, he recieved compensation already in what ever he recieved for it. Who cares if his image is upon it, if this image was some other person we might simply chalk it up to an overactive ego.

    • Pat Fields

      December 10, 2013 at 10:13 AM

      @ pop de adam … Nothing at all ‘convoluted’ about it. It’s as simple as you seek to make it, but without the false presumptions. What party initially … bought … the banknotes? None! Banks don’t … sell … banknotes. If you lend someone a painting you created, can he claim to own it? If he in turn lends it, does THAT party ‘own’ it? If someone along the line makes a lithograph of it and becomes fantastically wealthy selling millions of copies … who has paramount right to sue out damage? How ever many parties the painting passes hands into … you’re the true owner of both the physical medium and the intangible ‘intellectual’ property in the image you’d created on the medium.

      Banknotes are … borrowed… every last one of them. If they were bought outright, then banks wouldn’t have any right to ‘earn’ interest on them … would they? And if governments didn’t ‘guarantee’ those banknotes with their ‘esteem’, then they’d have no ‘service’ or ‘benefit’ to tax … would they?

      Simple enough … isn’t it?

      • pop de adam

        December 10, 2013 at 11:40 AM

        If I lend out my painting to someone and they find some way or reason to dispose of as if they owned it, I would be perfectly reasonable to treat it as an exchange, it becomes a debt owed to me or I simply regard what ever was used as escrow/collateral as my own.

        I think it should be realized that it is not the gold, the notes or anything of these detours into intellectual “property” that are the goal of these schemes, the goal is access to your labor. Should access to ones own labor or the product thereof be relegated to a granted privilege?

        Did Picasso create his own pigments down to the individual molecules that comprise them?

        If everything is borrowed into existance, then even the papers and inks comprising these notes are borrowed. Does the treasury/mint pay for the linen paper from Crane & Co of Dalton Ma with FRNs printed on the very same paper they produce? Does the producer of the inks accept their own finished product in return for more ink? Wouldn’t these parties profit more if they just found a engraver/printer and founded their own partnership? Does this seem stupid to you when taken to this extreme? As if anything that exists after the advent of fiat money is immediately and entirely attibutable to the existance of this fiat money.

        pardon the ramble, just seems silly to me.

  8. Anthony Clifton

    December 10, 2013 at 10:40 AM

    one more time for the children in the hospital…

    I went to sleep with the hope that made America famous.
    I had the kind of a dream that maybe they’re still trying to teach in school.
    Of the America that made America famous…and
    Of the people who just might understand
    That how together yes we can
    Create a country better than
    The one we have made of this land

    who got the gold

  9. Yartap

    December 10, 2013 at 1:06 PM

    1. Right now, ETF’s/Futures on fractional reserve paper Gold is setting at 10% of gold demand. 2. The central banks will not disclose the true amounts of holdings in physical gold.
    3. COMEX’s trades mostly (98%) of its gold sales in paper gold (a promise).
    4. China and India’s demand for physical gold are the highest in the world.
    5. And China and India’s external debt (foreign debt) to GDP is the lowest in the world.

    Instead of focusing upon world currencies, shouldn’t we focus upon the time when China and India possibility corner most of the world’s gold markets?

    Your thoughts – please. Yartap.

  10. Joe L'Amarca

    December 10, 2013 at 1:55 PM


  11. Peter

    December 10, 2013 at 3:44 PM

    Went to the coin shop today and thanked the dealer for accepting my green trash. He responded, now I have to get rid of this stuff. It is stuff you want to turn around fast at this stage of the game. Many folks that I encounter my question is: does it seem time is advancing faster than usual? well, they say, yes. It is funny because I ask this of all age groups, it was common in earlier days that you would just hear this from old folks. Now it seems all ages experience this. Strange days we live in . I may be delusional but something in my heart tells me we are close to something big, something to be taken very seriously . In the past 5 years it seems every time I drove to the westside of town to trade in my green trash for “real money it was always done with urgency!! Let this be a message to those that don’t or haven’t experienced this similar scense of urgency to consider the message that I am trying to convey . THERE WILL COME A TIME VERY SOON PHYSICAL WILL NOT BE AVAILABLE. Find a coin dealer that has the same concerned , panicked assessment as me and get rid of green trash,now!

    The coin dealer is like the grocery retailer his shelves will be wiped out in a matter of hours !
    It is still the same, every time I went to get rid of green trash even to this day, I experience a sense of relief and satisfaction that I have ben obedient to the Law book known as The First Five Books of The Bible and that which pertains to just weights and measures

    • Jetlag

      December 10, 2013 at 3:57 PM

      @Peter “Went to the coin shop today and thanked the dealer for accepting my green trash. He responded, now I have to get rid of this stuff.”

      If see him again, you might ask the dealer what he ended up doing with the green trash you gave him. Did he buy coins with it?

  12. Peter

    December 10, 2013 at 4:16 PM

    The coin dealer is like the rest of the populous, he is in tune with pictures at eleven and clueless of the reality espoused on this website, he is informed from a source alien to this blog. Many coin dealers are hooked into pictures at eleven and blind to what you know and that which I know. Trying to penetrate his reality tuens into an episode of “CROSSFIRE” .


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s