Sunday, January 11, 2009

Chinese Central Bank to Test Program to Settle Trade in Yuan Rather Than Dollars

A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.

The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error - or considerable fiscal strain - is likely to cause the dollar to lose reserve currency status entirely.”The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world's central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.“The private sector's use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”...

According to Alibaba.com, the online company that matches Chinese suppliers with international buyers, the vast majority of their almost 700,000 Chinese suppliers no longer use dollars to settle non-US transactions in order to minimise foreign exchange risk.
So one could read the pending PBoC pilot of a yuan-based trade settlement system as a response to realities on the ground. But there have also been US reports of far more fundamental discontent with the dollar, per the New York Times in August:

He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.
And Reuters reported a more frontal attack in October in an article that appears likely to have been sanctioned:
The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies...The People's Daily is the official newspaper of China's ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington's economic policies and global financial dominance in the wake of the credit crisis.

China's central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar.

Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations.

Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said.The dollar's exchange rate has become more volatile since the global financial crisis began.The central bank said it will make the exchange rate of the yuan more flexible and keep it "basically stable on a reasonable, balanced level."There has been speculation that the yuan's appreciation will slow down, which would help Chinese exports maintain price advantages in overseas markets

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