Precious Metals: Expanding Chinese Yuan International Exchange Hurts US Dollar Demand
By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com …..
On October 10, the People’s Bank of China signed a three-year $60 billion currency swap agreement with the European Central Bank. This followed the October 1 Chinese swap agreement with Indonesia and the September swap agreements with Hungary and Albania. With the latest signing, China has now completed swap arrangements with 22 regions and individual nations.
In 2010, the Bank for International Settlements (BIS) reported that China’s yuan was the 17th most traded currency in international markets. Last month, before the latest agreements, the BIS reported that the yuan had moved up to the ninth highest volume currency in international transactions. The latest agreements, especially the one with the European Union, will certainly boost the Chinese yuan’s international usage.
The agreements thus far have mostly been with nations in Asia, Europe, and the Middle East. China is expected to next focus on negotiating with nations in South and Latin America, as thus far Brazil is the only nation in those regions with an agreement.
On xinhuanet.com, Guo Tanyong, who is a financial studies professor at the Central University of Finance and Economics, was quoted saying, “The global increasing need for renminbi transactions is a natural choice as the Chinese yuan has a stable exchange rate and is more risk-proof.”
In recent years, the China yuan’s value has been more stable than that of the US dollar, euro, pound, yen, and Swiss franc. The relative stability of the yuan makes it more desirable worldwide as a currency for settling international transactions. In addition, the yuan is even more attractive right now because of the possible risk of a US debt default if the federal government is unable to resolve its budget and debt ceiling problems.
The agreement with the European Union is a significant coup for the Chinese government. To the extent that more international transactions are conducted in currencies other than the US dollar, that will reduce foreign demand for dollars. This will eventually affect every American.
The use of US dollars in international commerce represents an interest-free loan to the US government. As foreign demand for dollars declines, the excess currency will be repatriated to the US. Such an action would force the US government to redeem this currency for goods and services, reducing America’s wealth and increasing the federal budget deficit. Inevitably, the US government would have to pay a higher interest rate on its debt.
The only way to stop this trend would be for the US dollar to be perceived once more as being “as good as gold.” But, with quantitative easing increasing year by year, the politicians in Washington are headed in the opposite and wrong direction. For self-protection, Americans should be shorting the US dollar and buying either Chinese yuan or what the Chinese government is adding to its reserves—physical gold.
Patrick A. Heller was honored with the American Numismatic Association 2012 Harry J. Forman Numismatic Dealer of the Year Award. He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster ( under “News & Articles) and at CoinInfo. His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com. He is also the financier and executive producer of the forthcoming movie “Alongside Night” (trailer posted at http://www.youtube.com/watch?v=sTZ8vn45Cds).