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China Undermining U.S. Dollar Dependence with Yuan

China's signing of a currency swap agreement with Argentina, whereby Argentina will receive 70 billion yuan (US$10 billion) marks the sixth such agreement since December 2008. A total of $650 billion yuan has been lent to banks in Hong Kong, Korea, Indonesia, Malaysia, Belarus, and now Argentina.

Beijing's goal is for these countries to pay for their Chinese imports in Yuan, thereby reducing dependency on the U.S. Dollar and making it less volatile. This is the first time China has extended the deal to a Latin American country and is a signal that China's strategy will be applied across the world.

The implications for the U.S. Dollar in the long terms are significant. If a substantial portion of the world's trade is conducted in Yuan as opposed to dollars in the future, then there will be less incentive for foreign investors to buy treasuries, which will make it more difficult for the U.S. to finance its debt.

Alberto Ramos, a Latin America economist at Goldman Sachs Group Inc. in New York, said the agreement with Argentina is a "symbolic move and an indirect way to shun the U.S. dollar."

"Never before has China had such influence," said University of Alberta scholar Wenran Jiang. "When we see hints that China might get out of the U.S. dollar, world stock markets react."

China's increasing influence in international monetary policy is a worrying trend for the United States, who earlier this month rebuffed China's suggestion that a new global currency based on the International Monetary Fund's Special Drawing Rights was required.

"I don't believe there is a need for a global currency," US President Barack Obama said at a press conference on Tuesday, March 24th.

Both US Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke said they would not support a plan to strip the dollar of its reserve status.

The Federal Reserve's decision earlier this month to buy more than $1 trillion in long-term U.S. debt to push down rates drove the dollar sharply lower, though Asian officials said the actions were unsurprising given how much private lending has slowed.

"China is engaging in a war of nerves with the U.S. as it is trying to see what move the new U.S. administration makes, and the recent comments have been made in that context," said a Japanese government official.

"But it won't make a drastic shift, given its massive holdings of U.S. Treasuries," the official, who was not authorized to speak to the media, he said.

SOURCE: http://www.midasletter.com/news/09033101_China-undermining-us-dollar-dependence-with-yuan.php

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