Sunday, March 2, 2008

The Future of US Dollar As Reserve Currency

There are mounting global concerns about sharp decline in the value of US dollar against the euro and other major world currencies. Not only has it fueled inflation with higher prices of basic commodities such as food grains, oil and metals but it has also diminished the value of the reserves held in dollars by the vast majority of central banks around the world. These issues are giving to rise to a discussion of how long can the US dollar remain as the currency of choice for central bankers. To understand this discussion, let's look at the history of reserve currencies in the past and the current situation with global trade.

When the 20th century began, the U.S. was already the world's biggest economy, but the British pound still accounted for nearly two-thirds of official foreign-exchange reserves held by the world's central banks. The dollar didn't become the dominant currency until after World War II. Even then, some commodities still traded in pounds: The London sugar market didn't jettison sterling for a dollar-denominated trading contract until around 1980. The history lesson here is that, while the reserve and trade currencies can and do change, it takes a significant re-architecture of the world economy and trade and significant amount of time for it to happen. Nearly two-thirds of the world's central-bank reserves remain denominated in dollars, according to data from the International Monetary Fund, despite widespread fears of a mass exodus from the currency. The euro accounts for about a quarter -- up from 18% when it was introduced in 1999, but less than its predecessor currencies' share in 1995. Because the U.S. is such a huge trading partner for so many countries, the reserve buildup isn't easily unwound.
According to the Wall Street Journal, the dollar is also deeply entrenched in world trade. Businesses lower their transaction costs by dealing in a common currency. More than 80% of exports from Indonesia, Thailand and Pakistan are invoiced in dollars, for instance, according to the latest figures available in research by the European Central Bank, although less than a quarter of their exports go to the U.S.

While many nations want to change at least part of their reserve holdings from US dollars to euros, they know if they sell a significant share of their dollar reserves, it would weaken the dollar's value. That would potentially hurt their own trade competitiveness, and push down the value of their remaining dollar reserves. If they keep the dollars, a buildup of unwanted assets would only mount.
"There is no alternative to the dollar as a trading currency in Asia," Andy Xie, a Hong Kong-based economist told the Wall Street Journal. "Eventually, the renminbi [yuan] will replace the dollar in Asia, perhaps in our lifetime. But it will take at least 30 to 40 years."

29 comments:

wslome said...

Do you know where I can get a copy of this WSJ article?

Riaz Haq said...

Go to http://wsj.com and search for it. You probably need a subscription to do it.

Riaz Haq said...

Robert Fisk in the Independent says there is a move afoot to change the price of oil from US dollar:

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

Riaz Haq said...

Here's a Chinese report about the US pressure on Beijing to allow yuan exchange rate to float up against the US dollar:

The United Nations Conference on Trade and Development, a think tank, said in a report which was published on Tuesday that exposing the yuan to the fluctuating money markets would pose grave global risks.

"Expecting that China will leave its exchange rate to the mercy of totally unreliable markets and risk a Japan-like appreciation shock ignores the importance of its domestic and external stability for the region and for the globe," said the report.

Most economists believe that stability of exchange rates among the major world currencies is good for global revival from a deep recession.

Some Chinese analysts believe that if Beijing allows the yuan to rise in value by a margin the same as Japan did in appreciating the yen in the 1980s, China would be shocked by a suddenly precipitating export and a subsequent stagnation of its economy, just like Japan's "lost decade" in the 1990s, which is very likely to wreck the boat of global economic growth.

China's Premier Wen Jibao told world press on Sunday in Beijing that he did not think the yuan is undervalued, and his government will continue to push for currency exchange rate formation system reform that fits well with market demands.

Wen rejected outside interference in China's exchange rate policy decisions, and said that a stable yuan had helped not just China, but also the world, emerge from the worst global recession since the Great Depression.

The premier indicated that China is not to appreciate its currency under any pressure. He said: "We are opposed to the practice of engaging in mutual finger-pointing among countries or taking strong measures to force other countries to appreciate currencies."

Pressures Build up

A group of 14 American senators unveiled legislation on Tuesday that seeks to increase pressure on Beijing to let the yuan to rise in value against the dollar, alleging Chinese "currency manipulation" is hurting the US.economy.

The bill calls for stiff trade sanctions if China does not act.

US Treasury Secretary Timothy Geithner says the legislation is a sign of how strongly China's trading partners feel about the issue. In an interview on Fox Business Network, Geithner said that he believes Chinese officials "ultimately will decide it is in their interests to move."

Geithner declined to respond directly to a question of whether the Obama administration would support the bill backed by Senators Charles Schumer, Lindsey Graham, Debbie Stabenow, and 11 other senators.

"We are sending a message to the Chinese government," Schumer said in a statement. "If you refuse to play by the same rules as everyone else, we will force you to."

But Chinese Commerce Ministry spokesman Yao Jian said Tuesday the low rate of the yuan was not the reason for China's trade surplus.

"The United States... cannot ask others to (raise) their currency for the sake of its own export expansion -- that would be an egotistical practice," the spokesman added.

"Politicizing the exchange rate issue will not help the world to tackle the crisis," he said, adding that China hoped Washington would be "an advocate of free trade, not an obstructer."

Riaz Haq said...

Here's an excerpt from Wall Street Journal opinion titled "The Yuan Scapegoat":

At the core of .. argument is a basic misunderstanding of monetary policy. There is no free market in currencies, as there is in wheat or bananas. Currencies trade in global markets, but their supply is controlled by a cartel of central banks, which have a monopoly on money creation. The Federal Reserve controls the global supply of dollars and thus has far more influence over the greenback's value than any other single actor.

A fixed exchange rate is also not some nefarious economic practice rare in human affairs. From the end of World War II through the early 1970s, most global currency rates were fixed under the Bretton-Woods monetary system created by Lord Keynes and Harry Dexter White. That system fell apart with the U.S.-inspired inflation of the 1970s, and much of the world moved to "floating rates."

But numerous countries continue to peg their currencies to the dollar, and with the establishment of the euro most of Europe decided to move to a fixed-rate system. The reason isn't to get some trade advantage against their neighbors but to gain the economic benefits of stable exchange rates—and in some cases a more stable monetary policy. A stable exchange rate eliminates a major source of uncertainty for investment decisions and trade and capital flows.

The catch is that under a fixed-rate system a country yields some or all of its monetary independence. In the case of euro-bloc countries this means yielding to the European Central Bank, and for dollar-bloc countries to the U.S. Federal Reserve.

This is what China has done with its yuan peg to the dollar. By maintaining a fixed yuan-dollar rate, China has subcontracted much of its monetary discretion to the Fed in return for the benefits of exchange-rate stability. For more than a decade, this has served the world economy well, leading to an explosion of trade, cheaper goods for Americans that have raised U.S. living standards, and new prosperity for tens of millions of Chinese.

For years, the U.S. establishment has nonetheless been pressing China to "revalue" the yuan in the name of reducing the U.S. trade deficit. Never mind that much of this deficit is intra-company trade, with U.S. companies outsourcing production to China to stay globally competitive (and their U.S. workers and shareholders profiting). Beijing bent for a while in the middle of the last decade and adopted a crawling peg that revalued the yuan by about 18%, but that had little impact on the trade deficit. China re-fixed the peg amid the financial panic of 2008, and now the American "revalue" clamor is rising again.

China is right to resist these calls, not least because a large revaluation could damage China's growth. China has learned from the experience of Japan, which bowed to similar U.S. currency pressure in the 1980s and 1990s, revaluing the yen from 360 to the dollar to as high as 80 in 1995. As Stanford economist Ron McKinnon has shown, one result was domestic deflation in Japan and its lost decades of growth. Meanwhile, Japan continued to run a trade surplus, as imports fell with slower internal growth and cross-border prices adjusted. China has helped to lead the global economy out of this recession, and the world needs that to continue.

One proposed alternative is for China to once again move to a crawling peg, with a modest revaluation. But that would only invite more pressure on the yuan, as global "hot money" and currency speculators anticipate a further yuan rise. This is especially true with the Fed keeping dollar interest rates at zero, which also encourages more hot money into China in anticipation of a rising yuan.

Riaz Haq said...

In Silicon valley recently, the US federal government has pumped in about $500 million each into two green tech startups..Solyndra pv solar and Tesla all-electric cars. Obama was here this week to promote green tech and spoke to Solyndra employees.

In addition, there is $1 billion in federal grants being offered to biotech firms under the new healthcare bill.

The reason for US supremacy is partly explained by how much of its public funds it spends on higher education. A 2006 report from the London-based Center for European Reform, "The Future of European Universities" points out that the United States invests 2.6 percent of its GDP in higher education, compared with 1.2 percent in Europe and 1.1 percent in Japan.

Riaz Haq said...

Here's an excerpt from a WSJ report on Malaysian Muslims pushing gold as medium of exchange in trade rather than US dollar:

KOTA BHARU, Malaysia—Umar Vadillo bounds into a hotel room here in northern Malaysia with several stacks of gold and silver coins in his hands and slaps them down on a coffee table. "This," Mr. Vadillo says, "is what it means to be free."

A quarter century ago, this Spanish-born Muslim convert set to work with other European Muslims to find a substitute for the U.S. dollar and other paper currencies.

Pricing goods in greenbacks, they argued, was unfair. Many countries earn their income from finite resources like oil and other minerals, they said, while the U.S. and other countries can crank up their printing presses to pay for them—especially after Richard Nixon helped break the Western world's historical dependence on gold as a measure of value by taking America off the gold standard in 1971.

Last month, Mr. Vadillo's solution took shape when the local Muslim-led government in Malaysia's Kelantan state joined forces with Mr. Vadillo to introduce Islamic-style gold dinar coins as alternative currency.

Mr. Vadillo and the Kelantan government have persuaded more than a thousand businesses here in the state capital, Kota Bharu, to paste stickers in store windows saying they accept the coins.

Ordinary people can also pay taxes and water bills in gold and silver instead of paper money.
----
Plenty of people have their doubts about the dollar, as well as other currencies that aren't backed by gold or silver.

American libertarians such as Ron Paul frequently call for the reintroduction of a gold-backed currency, arguing that the Federal Reserve's ability to print money causes inflation and destroys savings.

Gold bulls have developed a cult following among investors who worry that precious metals are the only reliable store of value during rocky economic times.

If there's a utopia being formed for the globe's gold bugs, though, it's happening in a few unexpected outposts in the Muslim world like Kelantan.

Mostly that is because some Islamic thinkers teach that using currencies whose value is declared by governments is a form of usury. A piece of paper, they say, is just an IOU.

But with the global economy showing fresh signs of faltering, some believers think there's also a strong financial incentive to switch to gold dinars or the silver coins, known as dirhams.

Riaz Haq said...

Here is a NY Times Op Ed by Nobel Laureate Paul Krugman on questions about rule of law in US foreclosures crisis:

The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.

The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.

Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.

And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.

Riaz Haq said...

Here's a WSJ report on G20 meeting in Seoul and concerns about the effect of the planned $600 billion puschase of teasuries by Fed on the value of the US dollar:

As originally conceived, at least by the U.S., this G-20 gathering was a chance to push China to allow its currency to rise more quickly. U.S. officials want countries with large surpluses, such as China, to consume more domestically and export less, which would help America save more domestically and export more.

But Germany and China turned the tables, in effect accusing the Fed of driving down the value of the dollar, particularly through its plan to buy $600 billion of government bonds and other assets in coming months. U.S. officials replied that stimulating U.S. growth is in everyone's interest and that a weaker dollar is a byproduct of their efforts, not the objective.

Although China led the criticism, it isn't pushing to have the Seoul communiqué single out the Fed, a Chinese official said.

Officials in emerging markets say the capital inflows they are seeing mean they can't wait for international accords. With economies in the U.S., Japan and Europe feeble and their interest rates low, faster-growing nations like Brazil are attracting a frenzy of investment.

The capital inflows can create asset bubbles and overvalued currencies or stock markets, primed to plunge the moment investors decide to move their money elsewhere. Overvalued currencies also mean exporters lose their edge because their goods are costlier abroad.

Some emerging nations are embracing once-taboo policy prescriptions to restrict inflows, the latest example of the tensions generating by economic imbalances between rich and developing economies.

The IMF, which once criticized capital controls, now gives its blessing to measures like taxing foreign bond investments, and cites the success of such measures during the Asian financial crisis of the late '90s. The IMF and other keepers of the economic orthodoxy still emphasize the benefits of foreign direct investments, however.

Brazil, which floated its exchange rate in 1999, is a prime example of the predicament. With 7% growth rates, Brazil was already attracting foreign investment. Its 10.75% overnight interest rates have made it a target of investors who borrow where interest rates are near zero, such as the U.S. and Japan, and deposit it where rates are high. This "carry trade" helps explain why Brazil's real has risen around 35% against the U.S. dollar since the start of last year.

Masadi said...

Riaz Sahib what do you make of these numbers, they are quite baffling:

According to CIA World Factbook, tiny Hong Kong has $873 billion FDI stock abroad while China has $279 Billion and India $90 Billion, while the U.S. has $3597 Billion invested abroad (in owned corporations and securities abroad), and yet we hear about the China power house that will bring the U.S. to its knees!

Riaz Haq said...

Msasadi:"Riaz Sahib what do you make of these numbers, they are quite baffling"

As long as the US dollar is the world's reserve and trade currency and the US treasury can print as many as it wants, the US position is secured.

The key question is how long does the rest of world accept the status quo.

Masadi said...

Riaz sahib do you have some data on what % of global trade is accounted for by the U.S. and what % of that is between the U.S and its Euro(Japan etc, so called developed) counterparts? Please provide with source if you can.

Thank you sir.

Riaz Haq said...

Here's some WTO data on world trade:

The value of world merchandise exports fell 23% to $12.15 trillion in 2009, while world commercial services exports declined 13% to $3.31 trillion (Table 3). This marked the first time since 1983 that trade in commercial services declined year on year.

Transport services recorded the largest drop among service categories, followed by travel and other commercial services (Table 4). The drop in transport services is unsurprising as this category is closely linked to trade in goods. (For more detailed information on trade by country and region, including leading exporters and imports of merchandise and commercial services, see the appendix tables below.)

Appendix Table 3 confirms that China has now overtaken Germany as the world’s leading merchandise exporter, accounting for almost 10% of world exports, and is second to the United States on the import side. The US share in world merchandise imports is 13% compared to China’s 8%.



Here's an excerpt from a Forbes issue last year:

"But trade volumes were still 7.0% below their 2008 peak as of early 2010, according to the CPB Netherlands Bureau for Economic Policy Analysis. Global trade recovery has lagged that of global GDP and industrial production due to feeble demand in the U.S. and E.U. (27), which account for about 50% of global imports. This in turn has affected intra-E.U. trade, which accounts for two-thirds of total E.U. trade, as well as intra-Asia trade, 40-50% of which is re-exported to the U.S. and Europe."

US exports last year were $1.8 trillion, and its imports added up to $2.3 trillion, with an annual trade deficit of $500 billion, according to the Wall Street Journal.

Riaz Haq said...

Pakistan and China on Friday signed a currency swap arrangement to promote bilateral trade and investment and strengthen financial cooperation, according to an Express Tribune report:

State Bank of Pakistan (SBP) and People’s Bank of China (PBC) signed the currency swap arrangement in Islamabad, announced the central bank. The agreement was signed by SBP Governor Yaseen Anwar and PBC Deputy Governor DU Jinfu.

This is the second currency swap agreement that the government has signed with any country. Earlier, Pakistan and Turkey inked a similar arrangement with an option to trade in each other’s currencies equivalent to $1 billion.

An official handout said the bilateral currency swap arrangement has been concluded in 10 billion Chinese yuan and 140 billion Pakistani rupees. The programme will expire in three years, but can be extended with mutual consent. Pakistani importers can pay for Chinese goods in local currency.

“We expect that bilateral trade and investment will grow between Pakistan and China as a result of this agreement, further augmenting economic ties between the two countries,” it added. This agreement will contribute significantly to further strengthening close and special relationship between the two countries.

The currency swap agreement will give a positive signal to the market on availability of the other country’s currency on the onshore market, said the central bank, adding as a result it will promote bilateral trade denominated in Chinese yuan and Pakistani rupee.

Arrangement raises questions

However, industry insiders suspect that China will later convert the arrangement into a loan as it has expressed little interest in trading in Pakistani currency. On the loan, it can charge mark-up at a rate more than the Shanghai interbank market rate.

The insiders said when Pakistan proposed Beijing to sign the currency swap agreement China refused to deal in Pakistani currency. They said Pakistan had also proposed China to buy its treasury bills with the swap money, but Beijing refused.

They said Pakistani importers may still have to pay in Chinese currency despite signing of the swap arrangement.

Despite repeated attempts, State Bank officials were not available for comment.

Total volume of bilateral trade was $7.4 billion last year, tilted in favour of China. Pakistan’s exports to China stood at $1.6 billion compared to imports worth $5.8 billion, showing a deficit of $4.2 billion, said the commerce ministry.

http://tribune.com.pk/story/311206/pakistan-china-sign-currency-swap-agreement/

Riaz Haq said...

Here's Washington on Pak-China currency swap deal:

China announced a currency swap with Pakistan on Saturday in a new step to gradually expand use of its tightly controlled yuan abroad.

Beijing has begun allowing limited use of yuan in trade with Hong Kong and Southeast Asia in a move that could help to boost exports. It has signed swap currency deals with central banks in Thailand, Argentina and some other countries.

The Chinese central bank said it agreed Friday with its Pakistani counterpart to swap 10 billion yuan ($1.6 billion) for 140 billion Pakistani rupees. It said the money would promote investment and trade but gave no details of how it would be used.

Such agreements give central banks access to each other’s currency but commercial banks still need to create systems to issue letters of credit and handle other transactions in those currencies before companies can use them.

The United States and other trading partners complain Beijing’s controls on the yuan keep it undervalued, giving its exporters an unfair price advantage and hurting foreign competitors at a time when the global economy is struggling.

Some American lawmakers are demanding punitive tariffs on Chinese goods if Beijing fails to move more quickly in easing its controls.

Expanded use of the yuan abroad would reduce costs for Chinese traders who do most of their business in dollars and euros. It also might increase the appeal of Chinese goods for foreign buyers who have yuan to spend.

Beijing also has created a market for yuan-denominated bonds in Hong Kong. It said last week that some foreign investors who obtain yuan abroad would be allowed to invest them in China’s stock markets.

The Chinese central bank announced a currency swap agreement with Thailand this week and has carried out swaps with Argentina and Kazakhstan. It has pledged to lend yuan to some other countries’ central banks in case of emergencies.

Chinese leaders say they plan eventually to allow the yuan to trade freely abroad but analysts say it might be decades before that is completed.


http://www.washingtonpost.com/business/china-announces-currency-swap-with-pakistan-in-new-move-to-expand-yuans-use-abroad/2011/12/23/gIQAJ8HlEP_story.html

Riaz Haq said...

The UK Treasury has announced plans to make London the leading international centre for trading China's currency, the yuan, also known as the renminbi, according to BBC:

"London is perfectly placed to act as a gateway for Asian banking and investment in Europe," said UK Chancellor George Osborne.

Bankers say the plans could bring billions of pounds into the City.

China has been gradually relaxing strict controls on the value of its currency and on flows of capital.

Mr Osborne, who arrived in Hong Kong on Monday at the start of a visit to Asia, said he would be holding talks "on establishing London as the new hub for the renminbi market as a complement to Hong Kong".

The City, he said, as the world's largest centre for foreign exchange, was "uniquely placed to assist in the development of this exciting market".
Major currency

According to Treasury officials, the new partnership with Hong Kong puts London in pole position to be the major centre for trading the Chinese currency outside China and Hong Kong.

An intergovernmental agreement that London and Hong Kong would work together on yuan trading was reached last summer.

Following the relaxation of strict state controls, the yuan is set to become a major, globally-traded currency, in keeping with China's status as the world's second biggest economy.

A recent report by the Chatham House think tank forecast that trade transactions settled in the currency would reach around a trillion dollars (£650bn) by 2020.


http://www.bbc.co.uk/news/business-16571765

Riaz Haq said...

Here's an Asia Times piece on the importance of GCC Arabs to US power and US dollar:

There's no way to understand the larger-than-life United States-Iran psychodrama, the Western push for regime change in both Syria and Iran, and the trials and tribulations of the Arab Spring(s) - now mired in perpetual winter - without a close look at the fatal attraction between Washington and the GCC. [1]

GCC stands for Gulf Cooperation Council, the club of six wealthy Persian Gulf monarchies (Saudi Arabia, Qatar, Oman, Kuwait, Bahrain and the United Arab Emirates - UAE), founded in 1981 and which in no time configured as the prime strategic US backyard for the invasions of Afghanistan in 2001 and Iraq in 2003, for the long-drawn battle in the New Great Game in Eurasia, and also as the headquarters for "containing" Iran.

The US Fifth Fleet is stationed in Bahrain and Central Command's forward headquarters is based in Qatar; Centcom polices no less than 27 countries from the Horn of Africa to Central Asia - what the Pentagon until recently defined as "the arc of instability". In sum: the GCC is like a US aircraft carrier in the Gulf magnified to Star Trek proportions.

I prefer to refer to the GCC as the Gulf Counter-revolution Club - due to its sterling performance in suppressing democracy in the Arab world, even before Mohammed Bouazizi set himself on fire in Tunisia over a year ago.

Cueing to Orson Welles in Citizen Kane, the Rosebud inside the GCC is that the House of Saud sells its oil only in US dollars - thus the pre-eminence of the petrodollar - and in exchange benefits from massive, unconditional US military and political support. Moreover the Saudis prevent the Organization of Petroleum Exporting Countries (OPEC) - after all they're the world's largest oil producer - to price and sell oil in a basket of currencies. These rivers of petrodollars then flow into US equities and Treasury bonds.

For decades virtually the whole planet has been held hostage to this fatal attraction. Until now.

Gimme all your toys
-----------------
It's true that whoever dominates the GCC - with weapons and political support - projects power globally. The GCC has been absolutely key for US hegemony within what Immanuel Wallerstein defines as the world system.

Yet let's take a look at the numbers. Since last year Saudi Arabia is exporting more oil to China than to the US. This is part of an inexorable process of GCC energy and commodity exports moving to Asia.

By next year foreign assets held by the GCC could reach $3.8 trillion with oil at $70 a barrel. With all that non-stop "tension" in the Persian Gulf, there's no reason to believe oil will be below $100 in the foreseeable future. In this case GCC foreign assets could reach a staggering $5.7 trillion - that's 160% more than in pre-crisis 2008, and over $1 trillion more than China's foreign assets.

At the same time, China will be increasingly doing more business with the GCC. The GCC is increasingly importing more from Asia - although the top source of imports is still the European Union. Meanwhile, US-GCC trade is dropping. By 2025, China will be importing three times more oil from the GCC than the US. No wonder the House of Saud - to put it mildly - is terribly excited about Beijing.

So for the moment we have the pre-eminence of NATOGCC military, and USGCC geopolitically. But sooner rather than later Beijing may approach the House of Saud and quietly whisper, "Why don't you sell me your oil in yuan?" Just like China buying Iranian oil and gas with yuan. Petroyuan, anyone? Now that's an entirely new Star Trek.


http://www.atimes.com/atimes/Middle_East/NA20Ak02.html

Riaz Haq said...

China is the biggest trading partner of more nations than the US, reports AP:

In just five years, China has surpassed the United States as a trading partner for much of the world, including U.S. allies such as South Korea and Australia, according to an Associated Press analysis of trade data. As recently as 2006, the U.S. was the larger trading partner for 127 countries, versus just 70 for China. By last year the two had clearly traded places: 124 countries for China, 76 for the U.S.



In the most abrupt global shift of its kind since World War II, the trend is changing the way people live and do business from Africa to Arizona, as farmers plant more soybeans to sell to China and students sign up to learn Mandarin.

The findings show how fast China has ascended to challenge America’s century-old status as the globe’s dominant trader, a change that is gradually translating into political influence. They highlight how pervasive China’s impact has been, spreading from neighboring Asia to Africa and now emerging in Latin America, the traditional U.S. backyard.

Despite China’s now-slowing economy, its share of world output and trade is expected to keep rising, with growth forecast at up to 8 percent a year over the next decade, far above U.S. and European levels. This growth could strengthen the hand of a new generation of just-named Chinese leaders, even as it fuels strain with other nations.
-----------


The United States is still the world’s biggest importer, but China is gaining. It was a bigger market than the United States for 77 countries in 2011, up from 20 in 2000, according to the AP analysis.

The AP is using International Monetary Fund data to measure the importance of trade with China for some 180 countries and track how it changes over time. The analysis divides a nation’s trade with China by its gross domestic product.

The story that emerges is of China’s breakneck rise, rather than of a U.S. decline. In 2002, trade with China was 3 percent of a country’s GDP on average, compared with 8.7 percent with the U.S. But China caught up, and surged ahead in 2008. Last year, trade with China averaged 12.4 percent of GDP for other countries, higher than that with America at any time in the last 30 years.

Of course, not all trade is equal. China’s trade is mostly low-end goods and commodities, while the U.S. competes at the upper end of the market


http://www.boston.com/news/world/asia/2012/12/02/impact-china-surpasses-top-global-trader/gwI1PLvAcDPSo90KjJgTUM/story.html

Riaz Haq said...

Mary Kay Magistad of NPR's The World reported that China has reacted strongly to the Pentagon report on China's military growth and modernization with its first aircraft carrier, several nuclear submarines and stealth aircraft.

Magistead reported that Xinhua has for the first time talked about China as a global economic power with global interests and it needs a blue water navy to protect a tremendous number of sea-lanes.

http://www.theworld.org/2013/05/pentagon-china-military/

Riaz Haq said...

Few emerging nations in modern times have made the leap from assembler to inventor, copycat to innovator. For China, this would mean an overhaul of its economy. Many of the products China manufactures today aren't really very Chinese at all. Apple iPads might be exported from assembly lines based in China, but the Chinese themselves do little more than piece them together. The core technologies come from elsewhere, and even the factories are run by foreign firms (like Taiwan's Foxconn). For Chinese companies to compete with the world's best, they have to create products of their own that have a similar impact as the iPad. That requires a set of skills and know-how they don't yet possess and a level of managerial expertise they haven't yet developed. Economist William Janeway, author of the book Doing Capitalism in the Innovation Economy, says what has gotten China thus far won't be enough for the next step: "It is hard to start the process of pushing the frontier with [such] practices and policies." http://content.time.com/time/magazine/article/0,9171,2156209,00.html

Riaz Haq said...


The Obama administration accused the UK of a “constant accommodation” of China after Britain decided to join a new China-led financial institution that could rival the World Bank.
The rare rebuke of one of the US’s closest allies came as Britain prepared to announce that it will become a founding member of the $50bn Asian Infrastructure Investment Bank, making it the first country in the G7 group of leading economies to join an institution launched by China last October.

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Thursday’s reprimand was a rare breach in the “special relationship” that has been a backbone of western policy for decades. It also underlined US concerns over China’s efforts to establish a new generation of international development banks that could challenge Washington-based global institutions. The US has been lobbying other allies not to join the AIIB.
Relations between Washington and David Cameron’s government have become strained, with senior US officials criticising Britain over falling defence spending, which could soon go below the Nato target of 2 per cent of gross domestic product.
A senior US administration official told the Financial Times that the British decision was taken after “virtually no consultation with the US” and at a time when the G7 had been discussing how to approach the new bank.
“We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power,” the US official said.
British officials were publicly restrained in criticising China over its handling of Hong Kong’s pro-democracy protests while Mr Cameron has made it clear he has no further plans to meet the Dalai Lama, Tibet’s spiritual leader — after a 2012 meeting that prompted a furious response from Beijing.
While Beijing has long been suspicious about US influence over the World Bank and International Monetary Fund, China also believes that the US and Japan have too much control over the Manila-based Asian Development Bank. In addition to the AIIB, China is the driving force behind last year’s creation of a Brics development bank and is promoting a $40bn Silk Road Fund to finance economic integration with Central Asia.

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The Asia Infrastructure Investment Bank is one of four institutions created or proposed by Beijing in what some see as an attempt to create a Sino-centric financial system to rival western dominated institutions set up after the second world war. The other institutions are: the New Development Bank, better known as the Brics bank, and a contingent reserve arrangement, seen as alternatives to the World Bank and International Monetary Fund; a proposed Development Bank of the Shanghai Co-operation Organisation, a six-country Eurasian political, economic and military grouping dominated by China and Russia.


http://www.ft.com/intl/cms/s/0/31c4880a-c8d2-11e4-bc64-00144feab7de.html?siteedition=intl#axzz3UBLRoaEe

Riaz Haq said...

France, Germany and Italy to join China-backed bank - FT
- France, Germany and Italy have agreed to follow Britain's lead and join a China-led international development bank, dealing another blow to U.S. efforts to keep Western nations out of the new institution, the Financial Times said on Tuesday.

The newspaper, quoting European officials, said the decision by the four countries to become members of the Asian Infrastructure Investment Bank (AIIB) was a major setback for Washington, which has questioned if the new bank will have high standards of governance and environmental and social safeguards.

The AIIB was launched in Beijing last year to spur investment in Asia in transportation, energy, telecommunications and other infrastructure. It was seen as a rival to the Western-dominated World Bank and the Asian Development Bank.

China said earlier this year a total of 26 countries were founder members, mostly from Asia and the Middle East.

Japan, Australia and South Korea remain notable absentees in the region, though Australian Prime Minister Tony Abbott said at the weekend he would make a final decision on AIIB membership soon.

South Korea has said it is still in discussions with China and other countries about its possible participation.

Japan, China's main regional rival, has the biggest shareholding in the Asian Development Bank along with the United States

http://www.reuters.com/article/2015/03/17/europe-asia-bank-idUSL3N0WI5Z820150317

Riaz Haq said...

Germany calls for global payments system free of US
Foreign minister seeks European autonomy on issues like Iran


https://www.ft.com/content/23ca2986-a569-11e8-8ecf-a7ae1beff35b


German foreign minister Heiko Maas
Germany’s foreign minister has called for the creation of a new payments system independent of the US as a means of rescuing the nuclear deal between Iran and the west that Donald Trump withdrew from in May.

Writing in the German daily Handelsblatt, Heiko Maas said Europe should not allow the US to act “over our heads and at our expense”.

“For that reason it’s essential that we strengthen European autonomy by establishing payment channels that are independent of the US, creating a European Monetary Fund and building up an independent Swift system,” he wrote.

Mr Maas’s intervention was the “strongest call yet for EU financial and monetary autonomy vis-à-vis US,” said Thorsten Benner, director of the Global Public Policy Institute, a Berlin-based think-tank.

The foreign minister’s article highlights the depth of the dilemma facing European politicians as they struggle to keep the Iran deal alive while coping with the fallout of US sanctions imposed by Mr Trump against companies doing business with Tehran.

The EU has committed itself to the agreement and has vowed to protect European businesses from punitive measures adopted by Washington. But that has failed to convince EU companies, who are more interested in maintaining their access to the lucrative US market than in the more modest opportunities presented by Iran.

Last month Washington rebuffed a high-level European plea to exempt crucial industries from sanctions. Mike Pompeo, US secretary of state, and Steven Mnuchin, Treasury secretary, formally rejected an appeal for carve-outs in finance, energy and healthcare made by ministers from Germany, France, the UK and the EU.

[Europe must] form a counterweight when the US crosses red lines

Heiko Maas, German foreign minister
On Monday, Total, France’s largest energy company, announced it was pulling out of a big Iranian gas project, after admitting it might be affected by threatened US measures against Iran’s oil and gas industry.

Swift, a Belgium-based global payment system that facilitates many of the world’s cross-border transactions, is also affected. Unless it wins an exemption from sanctions, it will be required by the US to cut off targeted Iranian banks from its network by early November or face possible countermeasures against both its board members and the financial institutions that employ them.

These could include asset freezes and US travel bans for the individuals, and restrictions on banks’ ability to do business in the US.

Mr Maas’s words Handelsblatt come with relations between Germany and the US in their worst state for decades. Mr Trump has chastised Berlin over its large trade surplus, its relatively low military spending and its support for Nord Stream 2, a new gas pipeline that will bring Russian gas directly to Germany.

Meanwhile, Berlin has looked on in dismay as Mr Trump has withdrawn the US from the Iran deal and the Paris climate treaty, imposed import tariffs on EU steel and aluminium and appeared to question America’s commitment to Nato.

Mr Maas said it was vital for Europe to stick with the Iran deal. “Every day the agreement continues to exist is better than the highly explosive crisis that otherwise threatens the Middle East,” he said.

He also called for the creation of a “balanced partnership” with the US in which the Europeans filled the gaps left where the US withdrew from the world. Europe must, he said, “form a counterweight when the US crosses red lines”.

Riaz Haq said...

Money and Empire: Charles P. Kindleberger and the Dollar System

By Perry Mehrling

https://www.bu.edu/gdp/2022/11/08/money-and-empire-charles-p-kindleberger-and-the-dollar-system/

Charles P. Kindleberger ranks as one of the 20th century’s best known and most influential international economists. A professor of International Economics at the Massachusetts Institute of Technology (MIT) from 1948-1976, he taught cosmopolitanism to a world riven with nationalist instinct. He worked to relieve the fears of his fellow citizens through education, thinking that if people understood how the dollar system worked, they would stop trying to destroy it. His research at the New York Federal Reserve and Bank for International Settlements during the Great Depression, his wartime intelligence work and his role in administering the Marshall Plan gave him deep insight into how the international financial system really operated.

In the new book, “Money and Empire: Charles P. Kindleberger and the Dollar System,” Perry Mehrling traces the evolution of Kindleberger’s thinking in the context of a “key-currency” approach to the rise of the dollar system, which he argues is an indispensable framework for global economic development in the post-World War II era. The overall arc of the book follows the transformation of the dollar system, as seen through the eyes of Kindleberger.

The book charts Kindleberger’s intellectual formation and his evolution as an international economist and historical economist. As a biography of both the dollar and Kindleberger, this book is also the story of the development of ideas about how money works. In telling this story, Mehrling ultimately sheds light on the underlying economic forces and political obstacles shaping a globalized world.

Riaz Haq said...

India's oil deals with Russia dent decades-old dollar dominance | Reuters


https://www.reuters.com/markets/currencies/indias-oil-deals-with-russia-dent-decades-old-dollar-dominance-2023-03-08/

India in the last year displaced Europe as Russia's top customer for seaborne oil, snapping up cheap barrels and increasing imports of Russian crude 16-fold compared to before the war, according to the Paris-based International Energy Agency. Russian crude accounted for about a third of its total imports.
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NEW DELHI/LONDON, March 8 (Reuters) - U.S.-led international sanctions on Russia have begun to erode the dollar's decades-old dominance of international oil trade as most deals with India - Russia's top outlet for seaborne crude - have been settled in other currencies.

The dollar's pre-eminence has periodically been called into question and yet it has continued because of the overwhelming advantages of using the most widely-accepted currency for business.

India's oil trade, in response to the turmoil of sanctions and the Ukraine war, provides the strongest evidence so far of a shift into other currencies that could prove lasting.

The country is the world's number three importer of oil and Russia became its leading supplier after Europe shunned Moscow's supplies following its invasion of Ukraine begun in February last year.


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Some Dubai-based traders, and Russian energy companies Gazprom and Rosneft are seeking non-dollar payments for certain niche grades of Russian oil that have in recent weeks been sold above the $60 a barrel price cap, three sources with direct knowledge said.

The sources asked not to be named because of the sensitivity of the issue.

Those sales represent a small share of Russia's total sales to India and do not appear to violate the sanctions, which U.S. officials and analysts predicted could be skirted by non-Western services, such as Russian shipping and insurance.

Three Indian banks backed some of the transactions, as Moscow seeks to de-dollarise its economy and traders to avoid sanctions, the trade sources, as well as former Russian and U.S. economic officials, told Reuters.

But continued payment in dirhams for Russian oil could become harder after the United States and Britain last month added Moscow and Abu Dhabi-based Russian bank MTS to the Russian financial institutions on the sanctions list.

MTS had facilitated some Indian oil non-dollar payments, the trade sources said. Neither MTS nor the U.S. Treasury immediately responded to a Reuters request for comment.

An Indian refining source said most Russian banks have faced sanctions since the war but Indian customers and Russian suppliers are determined to keep trading Russian oil.

"Russian suppliers will find some other banks for receiving payments," the source told Reuters.

"As it is, the government is not asking us to stop buying Russian oil, so we are hopeful that an alternative payment mechanism will be found in case the current system is blocked."


Riaz Haq said...

Speaking at ET Awards for Corporate Excellence 2023 last week, the veteran banker had said, “I genuinely feel that the biggest financial terrorist in the world is the US dollar." Telling why he feels this way, the Kotak Mahindra Bank chief stated that all our money is in nostro accounts and somebody in the US can say

https://youtu.be/QXC9BsiRLlU

-----------------

'I'd like to correct': Uday Kotak clarifies ‘financial terrorist’ statement about US dollar

In the March quarter, Kotak Mahindra Bank witnessed a notable increase in its standalone net profit, which rose by 26.3 per cent year-on-year to reach Rs 3,495.6 crore

https://www.businesstoday.in/industry/banks/story/uday-kotak-clarifies-financial-terrorist-statement-on-us-dollar-as-reserve-currency-379470-2023-04-30

Uday Kotak, the CEO of Kotak Mahindra Bank, has provided further clarification on his recent statement about the US dollar being the "biggest financial terrorist in the world." Kotak clarified in a tweet that his statement about the "financial terrorist" was not specifically aimed at the US dollar but rather at the disproportionate power that any reserve currency holds.

According to Kotak, the US dollar's status as a reserve currency gives it an unfair advantage in controlling global transactions, which could potentially result in other countries becoming overly reliant on it. He further elaborated that a reserve currency wields significant power, including the ability to dictate whether money in nostro accounts can be withdrawn, which can have a profound impact on the global financial landscape. Kotak believes that the world is actively searching for an alternative reserve currency and posits that India has the potential to promote the Indian Rupee as a strong contender to fill this role on the global stage. By doing so, he suggested that India can reduce its dependency on the US dollar and promote a more diversified, stable global financial system.

He clarified his previous statement in a tweet saying, "In a recent discussion on the US dollar, I inadvertently used words 'financial terrorist,' which I would like to correct. What I meant was that a reserve currency has disproportionate power, whether it is nostro account, 500 bps rate increase, or emerging countries holding $ for liquidity."

In the March quarter, Kotak Mahindra Bank - the second-largest private bank in India - witnessed a notable increase in its standalone net profit, which rose by 26.3 per cent year-on-year to reach Rs 3,495.6 crore. The bank's net interest income (NII) also saw a significant jump of 35 per cent YoY to reach Rs 6,102.6 crore.

--------------

A nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign exchange and trade transactions.

https://www.investopedia.com/terms/n/nostroaccount.asp#:~:text=A%20nostro%20account%20refers%20to,foreign%20exchange%20and%20trade%20transactions.


Riaz Haq said...

Top 10 Countries that Export the Most Goods and Services (Current US$ millions - World Bank 2020)

https://worldpopulationreview.com/country-rankings/exports-by-country

Rank Country Exports (Current US$)
1 China $2,723,250.43
2 United States $2,123,410.00
3 Germany $1,669,993.51
4 Japan $785,365.75
5 United Kingdom $770,478.62
6 France $733,165.40
7 Netherlands $711,504.80
8 Hong Kong (China SAR) $612,566.52
9 Singapore $599,216.28
10 South Korea $596,945.20

Profiles of the world's largest exporters
1. China
Aside from the European Union (which is a collective of many countries), China is the world’s largest exporter. In 2020, China exported an estimated $2.72 trillion worth of goods and services, primarily electronic equipment and machinery such as broadcast equipment, computers, integrated circuits, office machine parts, and telephones. In 2018, China’s exports made up about 10.78% of the global total.

2. United States

The U.S. is the second-largest exporter in the world, with an estimated $2.12 trillion in exports for 2020. The largest exports of the U.S. are crude and refined petroleum; integrated circuits; pharmaceuticals and medical instruments; and aircraft including planes, spacecraft, and helicopters as well as their replacement parts. One of the reasons that the United States lags behind China in exports is the cost of labor. Many goods cannot be produced, manufactured, or assembled in the U.S. for a price comparable to that in China.

3. Germany
Having exported an estimated $1.67 trillion worth of goods and services in 2020, Germany is the world’s third-largest exporter. As one of the most technologically advanced countries in the world, Germany’s main exports include automobiles (BMW, Mercedes-Benz, Porsche, Audi, Volkswagen), pharmaceuticals (Bayer), aircraft, machinery, electronics, and chemicals. Germany is the third of three countries to have exports exceeding $1 trillion, behind only China and the United States.

4. Japan
Japan’s exports for 2020 were valued at an estimated $785.4 billion. Japan’s major exports include automobiles (Toyota, Honda, Nissan, Mazda, Suzuki, more) and automobile parts, integrated circuits and electronic devices (Nintendo, Panasonic, Sony, and many more). Japan's largest export customers are China, the United States, South Korea, Taiwan, and Hong Kong.

5. United Kingdom

The United Kingdom ranked as the fifth-highest exporter in the world in terms of dollar value in 2020, shipping an estimated $770.5 billion in goods and services to international customers. The U.K.'s top exports include cars (Bentley, Jaguar, Mini, Rolls-Royce, more), gas turbines, gold, medicines, hard liquor, antiques, and crude petroleum (which is often first imported from Norway, then exported to the rest of Europe, as well as China and South Korea).

Riaz Haq said...

Arnaud Bertrand
@RnaudBertrand
SCMP editorial: https://scmp.com/comment/opinion/article/3242880/dollar-still-king-how-much-longer

"The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. The central banks of both countries have agreed on their first currency swap...

In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other.

In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift."


https://x.com/RnaudBertrand/status/1728923824996139481?s=20

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The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. The central banks of both countries have agreed on their first currency swap worth a maximum of 50 billion yuan (HK$55 billion) over the next three years.

In immediate terms, the pact will foster bilateral commerce denominated in both the yuan and the riyal. In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other.

In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift. It has been a very long time coming.

Almost a year ago, President Xi Jinping made a historic visit to Riyadh, followed by Hong Kong Chief Executive John Lee Ka-chiu in February. A flurry of deals followed.


The Shanghai Stock Exchange and its Saudi counterpart have started collaboration on cross-listings, including exchange-traded funds (ETFs), financial technology (fintech), environmental, social and governance (ESG) and data exchange.

China, Saudi Arabia central banks sign currency swap accord to foster trade
21 Nov 2023
The People’s Bank of China (PBOC) building in Beijing on Tuesday, April 18, 2023. Photo: Bloomberg
The Hong Kong Monetary Authority, the city’s de facto central bank, and the Saudi Central Bank have enhanced ties covering the latest technologies in regulatory supervision and monitoring, and in financial fields such as tokenisation and new payment systems.

However, the latest currency swap pact will be the most important. It means trade can be conducted in local currencies, instead of defaulting to the US dollar. This may be seen as a challenge to US dollar dominance. Perhaps in the longer term, it is. But there is a good economic reason.

The current US federal interest rate of 5-plus per cent has pushed the dollar to historical levels against most other currencies, making trade denominated in the dollar more expensive.

There are obvious advantages for two big trade partners like China and Saudi Arabia to be able to utilise a local-currency option, which will help relieve pressures from having to trade in a more expensive currency.

Global “de-dollarisation” may take a while yet, but the trend already reflects cracks in a global economy long used to US currency settlements.

The yuan may or may not pose a challenge to dollar hegemony, but its internationalisation continues apace – to the benefit of both the Chinese and global economies.

Riaz Haq said...

The era of US dollar dominance is 'finished,' says Wall Street veteran who just retired after 54 years


https://markets.businessinsider.com/news/currencies/dick-bove-banks-usd-dollar-dominance-crypto-china-trade-outsourcing-2024-1

"The dollar is finished as the world's reserve currency," Dick Bove, who retired as a financial analyst after 54 years this month, told The New York Times. Bove, 83, predicted that China's economy would surpass America's in size.

The dollar's reign as the world's reserve currency is nearly over, Dick Bove says.

The newly retired bank analyst blamed corporate offshoring and flagged the threat posed by China.

Bove highlighted the de-dollarization trend and said other analysts are too bought in to admit it.

The US dollar has been the lifeblood of global finance and trade since World War II — but one Wall Street veteran thinks the end of that era is nigh.

"The dollar is finished as the world's reserve currency," Dick Bove, who retired as a financial analyst after 54 years this month, told The New York Times.

Bove, 83, predicted that China's economy would surpass America's in size. He blamed the outsourcing of US manufacturing to other countries, arguing that trend has given other countries more control of international production, the global economy, and worldwide money flows.

He also suggested that cryptocurrencies such as bitcoin could help fill the void left by the dollar's shrinking influence.

Dollar-denominated assets make up nearly 60% of international reserves, per the International Monetary Fund. However, several countries are embracing "de-dollarization" — working to erode dollar dominance — especially after the US took advantage of Russia's reliance on the greenback to levy sanctions against it following its invasion of Ukraine in 2022.

Nations ranging from Brazil and Argentina to India and Bangladesh are exploring the use of backup currencies and assets, such as the Chinese yuan and bitcoin, for trade and payments.

Several governments have blasted the excessive influence of US monetary policy on other economies and currencies, the dollar's strength for pricing out poor countries from imports, and the diminishing need for a petrodollar now the US has achieved energy independence through domestic shale oil and green energy production.

Bove, who worked at 17 brokerages during his career, told the Times that analysts who aren't forecasting dollar doom are simply "monks praying to money" who are unwilling to bite the hand that feeds them: the traditional financial system.