Whether it’s the renminbi/yuan or the Euro, for example, the world could indeed live on without the Dollar and has already created a way to circumvent it — just as the BRICS nations are attempting to launch their own internet system, separate from the currently U.S. dominated version. This article serves as a case-in-point.
An announcement Tuesday by the obscure-sounding Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, may not get much ink. China’s currency, it reported, was used in 8.66 percent of global trade finance transactions in October, the group said. It’s now the No. 2 most widely used currency for trade finance, supplanting the euro.
But that is a lot more important than it might sound. It gives an important window into how the global economy is changing–and why America’s long reign of economic dominance is at risk.
But the SWIFT data show that the renminbi, China’s currency (also known as yuan), is fast becoming the dollar’s major competition for dominance in global trade. It held only a distant second place in October, to be sure. the dollar accounted for more than 81 percent of global trade finance, to less than 9 percent for renminbi. But the speed with which China’s currency has gained market share as a tool for international trade is astonishing. In January 2012, it accounted for less than 2 percent of trade finance, behind the dollar, euro, and yen. One can easily imagine the renminbi being the dominant currency for financing trade within Asia within a few years.
It is no accident. The Chinese government has long sought a role as a financial power to match its economic might. It has sought to establish Shanghai as a financial capital on par with London or New York. Internal advocates of reform, particularly at the People’s Bank of China, have used this nationalistic goal to push for the changes that China will need to undertake if it to achieve those goals: Allowing a more free flow of capital in and out of China, backing away from its aggressive interventions to depress the value of the currency, and encouraging the development of modern bond markets.
Encouraging the use of yuan in trade finance has been perhaps the most successful aspect of China’s financial rise to date. In the new SWIFT report, quite logically China itself and Hong Kong (a special administrative region of China which has its own currency) account for the vast majority of the renminbi-denominated trade finance, 58 and 21 percent respectively. But China is making inroads beyond its own borders, with Singapore, Germany, and Australia counting for much of the remainder.
And the PBOC has established linkages with a range of foreign central banks, first in Asia and now in Europe, that will help ensure that banks around the world can get access to renmimbi when they need it. These “swap lines,” including one agreed to in October with the European Central Bank, should help give businesses confidence that they can finance trade with renmimbi without the fear that there will be a sudden freeze-up in money markets that mean they can’t convert their funds.
A German exporter, for example, can have confidence that if his bank has trouble getting access to yuan for whatever reason, the ECB can get access to the currency through the PBOC and then extend emergency loans to European banks.
There is an interesting parallel: This is exactly the tool that the U.S. Federal Reserve used during the 2008 crisis to help flood the global financial system with dollars at a time banks were hoarding them. At the peak, in December 2008, the Fed’s liquidity swap lines amounted to $580 billion with 14 foreign central banks. The Fed was the lender of last resort to the world; the fact that it would do such a thing is part of the reason the dollar is the global reserve currency.
Full article: This one number explains how China is taking over the world (Washington Post)