The Global Yuan, Dollars & Gold

What China's internalized Yuan means for the Dollar and Gold Investing...

WE HAVE written many times about the need for the Chinese Yuan to be a global currency and eventually a global reserve currency – one of several, rather than simply replacing the US Dollar as No.1, writes Julian Phillips of the GoldForecaster.com.

We have also talked of how China had to develop its banking system before it could take such a journey. And we highlighted the experiments that the Chinese were making first in Hong Kong, then in Guanchow, in using the Yuan in international dealings.

More importantly, we highlighted the consequences to other world currencies, in particular the US Dollar, of the Yuan becoming a well-used international trade currency. And the day is now here when the Chinese are starting to propel the Yuan onto the international scene.

These consequences of its arrival will come over time, but they could come overnight. One consequence is becoming even clearer, as we forecast, that the exchange rate of the Yuan will not rise much on foreign exchanges. Another is that central banks will insure against currency crises in the future by holding gold.

Should Chinese exporters and importers turn from a US Dollar price to a Yuan price for their deals, this would emasculate the US Dollar as quickly as it takes for banks and international traders to re-price their goods. If they act too quickly, the consequences could be chaotic for global foreign exchanges. If handled carefully the Dollar's international use will simply fade, producing major internal problems as these Dollars come home.

A number of the world's biggest banks have launched international road shows promoting the use of the Yuan to corporate customers instead of the Dollar for trade deals with China. HSBC and Standard Chartered are offering discounted transaction fees and other financial incentives to companies that choose to settle trade in the Yuan. Both banks are now capable of doing Yuan settlement in many parts of the world. All the other major international banks (such as Citigroup and J.P.Morgan) are rushing to join the fray with their own road shows. Beijing wants this to happen now. Chinese central bank officials are backing the banks in their efforts. Next year and beyond should see the Yuan standing next to the Euro and the US Dollar on foreign exchanges.

Cross-border trade in Yuan totaled CNY70.6 billion ($10bn) in the first half of 2010, twenty times the CNY3.6bn recorded in the second half of 2009. The eventual potential of global Yuan settled trades is 40 times this new level, up at $2,800 billion worth of goods and services currently settled in US Dollars and Euros.

The development of the Yuan market will be rapid and very dramatic, we believe here at the Gold Forecaster. But before we begin to discuss the consequences of this change, let's first reflect on some salient facts:

• For every Yuan transaction in Chinese trade, there will be one less US Dollar or Euro trade;
• As with the US Dollar international market, there will develop an offshore Yuan market. (The MacDonald's burger chain has already achieved a Yuan cash-raising bond offer.)
• The Yuan will be capable of being used between among countries outside China in trade between themselves;
• Capital markets will always favor currencies that are based on a strong growing economy;
• Once international, the Yuan will take its place in central bank reserves.

Those are the facts, but what are the consequences for the global economy, the US Dollar's role in international trade and in capital markets, and – as the globe's sole reserve currency – for the price of Gold Bullion?

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