The Backdoor Deal That Will Doom the Dollar

Written by Jason Simpkins
Posted March 21, 2014

It hardly made headlines, but it may be the final nail in the coffin for the U.S. dollar.

That is, on Wednesday, China announced a major new currency exchange deal that will allow direct conversions of the New Zealand dollar into Chinese renminbi.

That alone might not sound like much... But you have to consider the whole the picture here...

You see, prior to this deal the Chinese had to convert their renminbi to U.S. dollars and then convert those American dollars to Kiwi dollars to buy New Zealand goods.

This deal cuts out the middle man — i.e. us — and eliminates the need for each country to maintain large dollar holdings.

How big of a deal is this really?

Well, during 2013, trade between China and New Zealand totaled $18.2 billion, up 25.2% from the previous year, making the Mainland New Zealand's top destination for exports.

So that's nearly 20 billion U.S. dollars that these countries don't need — annually.

The New Zealand dollar is now the sixth currency in the world that can be directly traded with the renminbi, behind the U.S. and Australian dollars, the yen, the rouble, and the Malaysian ringgit.

But that's not all.

Dumping the Dollar

In addition to these deals, China has signed 24 currency swap agreements with central banks around the world since the financial crisis.

  • In 2009, China and Malaysia created an 80 billion RMB swap line.
  • In 2010, Iceland signed a $500 million currency swap agreement.
  • In 2011, China and South Korea doubled their existing currency swap line to 360 billion RMB.
  • Last year, Australia opened up a 200 billion RMB/A$30 billion swap line with China.
  • China has another swap agreement with the Bank of England worth 200 billion RMB, or 20 billion pounds.
  • And last October, while Congress was busy playing games with the debt ceiling, the PBOC and ECB opened up a three-year swap line worth 350 billion RMB.

In all, China has signed nearly 2 trillion RMB worth of currency swap deals with 24 countries and regions. These deals facilitate cross-border trade, open the door to foreign direct investment with renminbi, eliminate the need for U.S. dollars, and increase the role of China's currency.

A Bigger Role for the Renminbi

Indeed, the total amount of renminbi being exchanged worldwide more than tripled from 2010 to 2013, rising from $34 billion to $120 billion each day. As a result, the yuan is now the ninth-most traded currency in the world, up from seventeenth three years ago.

Rise of the Renminbi

It's virtually a shoe-in to reach second place by 2016. In fact, it's already overtaken the euro as the second-most widely used currency in global trade.

And you better believe China is intent on wrestling the top spot from the United States.

After all, it's already the world's largest exporter and it figures to have the largest economy in the world in just 15 more years.

The increased role of its currency — and the secondary role for the greenback — will reflect that transition.

China's Secret Stash

Currency swaps and trade agreements aren't the only steps China's taking to internationalize the yuan, either.

It's also going for the gold.

Indeed, Chinese gold demand rose 32% last year, and is up fivefold from 2003.

And that's just what the official statistics say.

It's widely believed that China is buying up more gold than it's letting on, and then stockpiling it in a secret stash.

I'm not making this up...

It's simple math:

Analysts estimate China imported at least 1,158 tons of gold last year. Meanwhile, its annual domestic production stands at more than 400 tons, and it's illegal to export the metal from the country.

That's over 1,500 tons of gold right there.

Yet, the Chinese government says demand totaled just 1,066 tons in 2013...

That's 500+ tons of gold that's unaccounted for.

And what's more is that the People’s Bank of China (PBOC) insists its gold reserves have remained steady since April 2009, at 1,054 tons.

That's hardly believable, considering the last time the PBOC raised its gold reserves, it did so overnight, announcing out of nowhere in 2009 that they'd almost doubled from 600 tons.

Why would China quietly accumulate gold?

Because it's hedging against the dollar.

China knows that the measures it's taking to make the renminbi the new cornerstone of international trade will weaken and debase the dollar.

That's somewhat problematic for the country, because it currently holds more than $2 trillion dollars. If the dollar loses its value, this huge mass of currency reserves will only be worth a fraction of what it is now.

However, gold will skyrocket in value. So having large holdings of the metal will help mitigate China's losses. It will also make its currency more credible.

Fight on,

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Jason Simpkins

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Jason Simpkins is an Editor of Wealth Daily and Investment Director of Secret Stock Files, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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