China's First Step Towards Bilateral Currency Swaps

Before the proposal of replacing USD with IMF's SDR as the world reserve currency, made by Zhou Xiaochuan, China's central banker, China had already made a series of bilateral currency swaps with some neighboring countries, with maturities of up to three years. Now they're extending the arrangement to Latin America.

Here's the list (in Billion Yuan, recent CNYUSD exchange rate 6.835):

• Hong Kong: 200
• South Korea: 180
• Indonesia: 100
• Malaysia: 80
• Argentina: 70
• Belarus: 20

According to a prominant economist in Beijing, these swaps serve dfferent purposes for each counterparty country: for Hong Kong, it's to prepare for the pending sale of Chinese T-bills there; for South Korea, it's for helping Korean companies raising capital in China; for Belarus, it's because Belarus wants to take CNY as their foreign reserve; for the rest, it's for settling bilateral trades (companies pay in the trading partner's local currency).

The implications are very intriguing:

1. The official line on the rationale behind these swaps is to reduce forex risk and trading cost. This is a valid point.
2. It offers support for currencies under downside risk. This applies to all except HKD.
3. It serves to diversify China's foreign reserve, albeit only a small percentage (5%) so far, away from USD and to align the composition better with trading partners.
4. Perhaps most importantly, the real meaning is that these are the first concrete step toward a post-USD world. The world trade cannot be based on bilateral currency swaps, to be sure. And CNY has a long way to go before it can become a world reserve currency. But as a transition, this certainly beats bartering, which has been remerging among countries and individuals.

Whether this will be brought up in the G20 summit remains an interesting question.

Stock position: None.

Comments

[waf76:]

the birth pangs of a new world, lol..

Apr 02 10:20 AM

[EUARTE:]

The warning signs are quite clear. This is not good for America. However, Obama has by his silence shown that he has no real interest in saving the dollar. His legislation depends on a bad economy and some fear inside America. Outside of America he has no clear agenda. Lots of lip service and qute shows of leftist blah blag.

Apr 02 02:04 PM

[Bo Peng:]

Over the time horizon of 10-20 years, I think the end of USD as the sole reserve currency is almost a certainty. Rather than putting up a futile fight or staying in denial, US could instead try to prepare for and take advantage of it. For example, a devalued USD can have many positive effects on US economy -- jobs, export. But it's something we're not used to, thus appears scary. It takes a change in mentality to adapt to it.

Apr 02 03:27 PM

[Ricard:]

The dollar was doomed well before Obama took the oath. It was not during his presidency that we engaged in two wars while "spending our way to prosperity" back home.

On Apr 02 02:04 PM EUARTE wrote:

> The warning signs are quite clear. This is not good for America.
> However, Obama has by his silence shown that he has no real interest
> in saving the dollar. His legislation depends on a bad economy and
> some fear inside America. Outside of America he has no clear agenda.
> Lots of lip service and qute shows of leftist blah blag.

Apr 02 04:32 PM

[EGGBEATER:]

PAPER CURRENCIES NOT BACKED BY SOLID GOLD BARS WILL ALWAYS BE EXPOSED TO DEVALUATION RISKS. THE USD, EURO, YUAN, YEN, GBP, - NON ARE BULLET PROOF AT THE END OF THE DAY.
GOVERNMENTS CAN EASILY PRINT CURRENCY BILLS; NOT SO WITH GOLD BULLION. THE WORLD SHOULD GO BACK TO THE GOLD STANDARD.

Apr 03 12:21 AM

[Dave Wrixon:]

That makes no sense. Countries have been ON and OFF the Gold Standard before. Even if they go back on they can come off again at any time, so frankly it proves nothing. What makes currency valuable is the means to pay and the will to pay. Even when there was a Gold Standard most of the money was never covered anyway. There was always more paper than Gold.


On Apr 03 12:21 AM JULES wrote:

> PAPER CURRENCIES NOT BACKED BY SOLID GOLD BARS WILL ALWAYS BE EXPOSED
> TO DEVALUATION RISKS. THE USD, EURO, YUAN, YEN, GBP, - NON ARE BULLET
> PROOF AT THE END OF THE DAY.
> GOVERNMENTS CAN EASILY PRINT CURRENCY BILLS; NOT SO WITH GOLD BULLION.
> THE WORLD SHOULD GO BACK TO THE GOLD STANDARD.

Apr 03 03:27 PM

[Stephen Yu:]

This is a big step in making the Yuan fully convertible to other currencies. This should allay some criticism that China manipulates its currency. Eventually, the Yuan will float just like other currencies, but it will take time.

In other news, Russia is considering a partial return to the gold standard! Whether people agree that the gold standard is a good thing or not, the message is clear. Russia, like China, is losing faith in the dollar. And if the dollar does fall, it will set off a chain reaction of competitive currency devaluation, just like it did in the 30's and in the 70's. I think all currencies are not safe in this environment, and hard assets are where opportunities are.

Apr 03 08:50 PM

[Bo Peng:]

Stephen, good point on the potential competitive devaluation. But if it happens, for example triggered by Japan/Switzerland/ECB doing QE, I think USD would only strengthen before world economy stabilizes, for the same reason why USD has strengthened after the Fed's QE announcement. If Yuan still holds on to the dollar peg under this scenario, then it'd create some very intriguing dynamics.

USD will remain strong for the duration of the depression, even though JPY collapsing is a distinct possibility. I don't know for how much longer Japan can bear the pain. Their decision yesterday to do practically nothing was very surprising to me.

Apr 08 07:10 AM