16 April 2013, 18:03

China attacks the international supremacy of the US dollar

Юань иена Юань японская иена 2011 декабрь коллаж

Internationalization of the yuan is an official goal of the Chinese authorities. So far, China attempted to reduce the dollar’s role in bilateral trading in the Asian region and South America, but its latest steps show that Europe is the next target.

For the first time ever, Chinese monetary authorities have signed a bilateral swap agreement with France. The most surprising aspect of the signed agreement is that the initiative of the swap came from the French central bank. Most observers were surprised by the fact that a European central bank is willing to help China in its quest to internationalize the yuan at the expense of the US dollar.

China Daily reports that "The Bank of France has been working on ways to develop a RMB liquidity safety net in the euro area with due consideration of a supporting currency swap agreement with the People's Bank of China". It seems that the final agreement is the result of a political bargain made by the French Foreign Minister Laurent Fabius who paid a two-day visit to Beijing last week. So far, the attempts to promote the yuan's internationalization in Europe have been limited to a three-year swap agreement signed by the Bank of England and People’s Bank of China. The importance of such swap agreements should not be underestimated. Normally, the US dollar (or a price referenced to the US dollar) is used for bilateral trade agreements between China and other countries, even if both counterparties don’t use the dollar as a domestic currency. This situation creates a disproportionate advantage for the American economy and the US government which can control the issuance of the world’s “base currency” and “export inflation” in order to finance its spending. China tries to dismantle the current international monetary system based on the US dollar and tries to establish bilateral swap lines with its main trading partners. The swap agreements allow the central banks of the two countries to borrow each other’s currency and provide sufficient liquidity for the companies wishing to buy the Chinese or European currency without first buying the US dollars. Under normal circumstances such a trade is either impossible or very expensive, forcing the European importers to use the American currency, but the establishment of the swap lines aims to remove the hurdles for direct currency exchange.

The US opposes the internationalization of the yuan, but it has no means of stopping the process. It is only a matter of time until the dollar’s supremacy will come to an end.

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