SATURDAY, MARCH 29, 2014 AT 11:07AM
The word dollar didn’t even come up. “The volume of transactions that can be carried out in the Chinese currency in international and German financial centers is not commensurate with China’s importance in the global economy,” the Bundesbank explained in its dry manner on Friday in Berlin, after signing a memorandum of understanding with the People’s Bank of China. President Xi Jinping and Chancellor Angela Merkel were looking on. It was serious business. Everyone knew what this was about. No one had to say it.
The agreement spelled out how the two central banks would cooperate on the clearing and settlement of payments denominated in renminbi – to get away from the dollar’s hegemony as payments currency and as reserve currency.
This wasn’t an agreement between China and a paper-shuffling financial center like Luxembourg or London, which are working on similar deals, but between two of the world’s largest exporters with a bilateral trade of nearly $200 billion in 2013. German corporations have invested heavily in China over the last 15 years. And recently, Chinese corporations, many of them at least partially state-owned, have started plowing their new money into Germany.
This “renminbi clearing solution” – the actual mechanism, clearing bank or clearing house, hasn’t been decided yet – will be an important step for China to internationalize the renminbi and ditch its reliance on the dollar. It will be located in Frankfurt; that the city is “home to two central banks,” Bundesbank Executive Board Member Joachim Nagel pointed out, made it “a particularly suitable location.”
As a world payments currency, the renminbi is still minuscule but growing in leaps and bounds: in February, customer initiated and institutional payments, inbound and outbound, denominated in RMB accounted for only 1.42% of all traffic, but it set a new record,according to SWIFT, the NSA-infiltrated, member-owned cooperative that connects over 10,000 banks, corporations, the NSA, and other intelligence agencies around the world.
Despite China’s heft as the second largest economy, the yuan was only in eighth place as payments currency, behind the Swiss franc. The dollar and the euro have been duking it out over the top spot. In February, the dollar accounted for 38.9% and the euro for 33.0% of all payments traffic. January last year, for example, the euro was in first place with a share of 40.2%, while the dollar only came up with 33.5%. As China moves away from the dollar, its share as payments currency will continue to drop.
And Merkel, whose job it had been to keep the Eurozone together by tightening duct tape and bailing wire around the necks of other countries, hasn’t forgotten: “We’re very thankful that China made efforts during the euro crisis to consider the euro a stable currency,” she said at the press conference. “China never questioned its trust in the euro, and I find that very important....”
Setting up Frankfurt as an offshore renminbi trading center has been in the works since 2012. A steering committee was set up in July 2013 that included the Economics Ministry of the state of Hesse, the Federal Finance Ministry, and the Bundesbank. In October 2013, the “RMB Initiative Group” – which included the four Chinese banks with a presence in Frankfurt, German financial services giants, and the Bundesbank – met for the first time. The working group that deals with the establishment of the RMB clearing solution is headed by the Bundesbank and counts SWIFT among its members. German corporations and trade associations all support the initiative.
It was “a major step forward in intensifying Germany’s economic relations with China,” said Bundesbank Executive Board Member Carl-Ludwig Thiele.
In its coverage of the event, state-owned Xinhua News Agency outlined China’s “three-pronged” strategy for promoting the internationalization of the RMB: “facilitating international trade and investment denominated and settled in RMB, encouraging offshore RMB service centers to develop offshore RMB-denominated financial products, and encouraging central banks to hold RMB assets as part of their foreign exchange reserves.”
A succinct definition of breaking the dollar’s hegemony as payments currency, investment currency, and reserve currency – China’s strategy since 2009.
At the time, the financial crisis in the US sent cold shivers down the spine of China’s government that until then had been sitting loosey-goosey on mountains of US paper that suddenly threatened to evaporate, such as Fannie Mae’s and Freddie Mac’s mortgage backed securities that China had somehow thought were worth something when in fact they were not – at least not until China applied enough pressure on the Bush Administration to guarantee them and on the Fed to buy them to inflate their value.
China got bailed out by the US taxpayer and the Fed, but the episode taught the government a lesson: dump the dollar. And so it went about it, carefully, systematically, step by step, but relentlessly, as Xinhua said, in a “multi-pronged” strategy that included making broad-ranging bilateral currency deals with one country at a time.
Compared to China, Russia is small fry in terms of trade and financial relations with the US. But it too has had it. The first official warning shot was fired before its all-out assault on the dollar system begins. Not by a Putin advisor that can be brushed off, but by Russia’s Minister of Economy and former Deputy Chairman of the Central Bank. A major escalation. Read.... Kremlin: If The US Tries To Hurt Russia’s Economy, Russia Will Target The Dollar
China & Germany Sign Yuan-Settlement Pact And Obama Heads To Saudi Arabia
Submitted by Tyler Durden on 03/28/2014 22:04 -0400
Submitted by Mike Krieger of Liberty Blitzkrieg blog,
I haven’t paid too much attention as of late to agreements between China and other nations intended to expand the use of the yuan (renminbi) internationally, because the near-term implications always seem to be exaggerated by many market commentators. That said, this deal between the People’s Bank of China (PBOC) and Germany’s Bundesbank seems quite significant given the importance of Germany within the global economy generally and the E.U. specifically.
From Bloomberg via BusinessWeek:
Germany’s Bundesbank and the ?People’s Bank of China agreed to cooperate in the clearing and settling of payments in renminbi, paving the way for Frankfurt to corner a share of the offshore market.The central banks signed a memorandum of understanding in Berlin today, when Chinese President Xi Jinping met German Chancellor Angela Merkel, the Frankfurt-based Bundesbank said in an e-mailed statement.Germany’s financial capital prevailed over Paris and Luxembourg in a euro-area race to win trade in renminbi, which overtook the euro to become the second-most used currency in global trade finance in October, according to the Society for Worldwide Interbank Financial Telecommunication. The U.K. Treasury said on March 26 that the Bank of England would sign an initial agreement with the PBOC on March 31 to clear and settle yuan transactions in London.“Frankfurt is one of Europe’s foremost financial centers and home to two central banks, making it a particularly suitable location,” said Joachim Nagel, a member of the Bundesbank’s executive board. “Renminbi clearing will strengthen the close economic and financial ties between Germany and the People’s Republic of China.”China was Germany’s third-biggest foreign trade partner last year, with 140 billion euros in turnover passing between the two countries, according to the Federal Statistics Office in Wiesbaden.China ranks fifth among importers of German goods and is the second-biggest exporter to Germany.German companies including Siemens AG, the country’s biggest engineering company, and Volkswagen AG are embracing the renminbi internally as a third currency for cross-border trade settlements.“The potential is vast,” said Stefan Harfich, the Siemens Financial Services manager, who steered the introduction of the yuan at the Munich-based company in October. “The introduction of the renminbi as an official company currency will therefore have a big impact on Siemens’s business in the coming years.”Daimler AG, the Mercedes manufacturer that sold 235,644 autos in China last year, issued 500 million yuan of one-year notes in Asia’s largest economy on March 14, in the first so-called panda bond by an overseas non-financial company.
With all that in mind, let’s not forget that Obama is currently in Saudi Arabia trying to restore ties with the Medieival Kingdom, i.e., he is trying to figure out a way to armal-Qaeda in Syria without the American public finding out about it.
From the Wall Street Journal:
RIYADH—Barack Obama’s visit to Saudi Arabia on Friday marks a bid to warm relations that the Saudis hope will result in commitments by the U.S. president to boost the supply of sophisticated weapons to Syrian insurgents.Mr. Obama’s stopover at the end of a European tour will mark his first visit to the kingdom since U.S.-Saudi ties were severely strained last year following the renewal of high-level U.S. contacts with Iran and the cancellation of planned airstrikes against the regime of Syrian President Bashar al-Assad.Saudi officials also are hoping he will bring word of a breakthrough in U.S. and Jordanian opposition to supplying Syrian rebels with more advanced weapons, including shoulder-launched missiles, known as manpads, capable of bringing down Syrian aircraft, according to Saudis, a Western diplomat and regional security analysts familiar with the situation.Saudi officials also are hoping he will bring word of a breakthrough in U.S. and Jordanian opposition to supplying Syrian rebels with more advanced weapons, including shoulder-launched missiles, known as manpads, capable of bringing down Syrian aircraft, according to Saudis, a Western diplomat and regional security analysts familiar with the situation.Jordan also has blocked delivery of the additional weapons through its territory to rebels in Syria, for fear of getting pulled deeper into the Syrian conflict. The diplomat and two Syrian opposition officials said Amman is waiting for the U.S. to approve the deployment of Saudi-bought manpads currently sitting in Jordanian warehouses.Saudi royals have muted their angry rhetoric since last autumn’s rift. Prince Turki Al Faisal, whose criticism of the Obama administration’s policies on Iran and Syria made front-page news in December, made virtually no mention of the U.S. during a U.S. speech about Iran this month. A Saudi ambassador who wrote of Saudi Arabia breaking with the U.S. in the New York Times in December has been publicly silent since.
It appears that becoming entrenched in a Syrian civil war is still very much on the table…
Lots of moves appear to be afoot on the macro front at the moment. The months ahead should be very interesting to say the least.
Germany, England, Canada and the U.S. are all vying to become Western centers for the Yuan trade.
Bloomberg reports today:
Germany’s Bundesbank and the People’s Bank of China agreed to cooperate in the clearing and settling of payments in renminbi, paving the way for Frankfurt to corner a share of the offshore market.***The central banks signed a memorandum of understanding in Berlin today, when Chinese President Xi Jinping met German Chancellor Angela Merkel, the Frankfurt-based Bundesbank said in an e-mailed statement.Germany’s financial capital prevailed over Paris and Luxembourg in a euro-area race to win trade in renminbi, which overtook the euro to become the second-most used currency in global trade finance in October, according to the Society for Worldwide Interbank Financial Telecommunication.***Deutsche Boerse AG, which operates the Frankfurt Stock Exchange, also signed anagreement with Bank of China, expanding a partnership that will make it easier for Chinese issuers and Asian investors to access European capital markets, including stock listings.***German companies including Siemens AG, the country’s biggest engineering company, and Volkswagen AG are embracing the renminbi internally as a third currency for cross-border trade settlements.
The BBC pointed out Wednesday:
The Bank of England has agreed a deal with the People’s Bank of China to make London a hub for Chinese currency dealing.The memorandum of understanding, to be signed on Monday, sets out settlement and clearing arrangements for the renminbi, or yuan, in London.The signing is expected to be followed by the appointment of a London clearing bank for yuan.62% of yuan payments outside of China already take place in London.***Last year the UK and Chinese central banks signed a three-year currency swap arrangement worth 200bn yuan which allows them to swap currencies and can be used by firms to settle trade in local currencies rather than in US dollars.The International Finance Corporation, the private sector arm of the World Bank, this month issued a 1bn yuan bond in London, the first by an international financial institution.The Chancellor of the Exchequer, George Osborne, said: “Connecting Britain to the fastest growing parts of the world is central to our economic plan.
The Globe and Mail noted last month:
Two Canadian cities are vying to become North America’s primary centre for trading the Chinese yuan, an effort that has received federal backing amid a broader desire by Ottawa to strengthen ties with Beijing.***No city in North or South America has yet developed as a major [yuan] settlement centre.***Both Toronto and Vancouver see an advantage in being located in a common time zone with a large number of companies trading with China, be they American retailers or Chilean copper miners. Toronto has sought to seize on its status as Canada’s major financial centre. Vancouver, meanwhile, argues its advantages stems from its existing volumes of trade finance, its substantial Chinese-speaking population and an incentive program that exempts foreign exchange trading from provincial taxes.B.C. also took a lead in the RMB market in November when the provincial government launched a “dim sum” – or RMB-denominated – bond worth nearly $425-million. It was the first triple-A rated foreign government to do so.
The U.S. isn’t ready to cede the North American yuan trade to Canada.
According to the San Francisco Chronicle, San Francisco is also bidding to become a yuan trading center.
The times, they are a changing …