Will China dominate global finance?

It is clear that the Chinese government is actively seeking to make its yuan currency one of the most important currencies for international trade.

Over the past few years, China and a number of nations have concluded bilateral agreements. Under these agreements, trade between China and the other country will only be priced in the currencies of their two nations rather than in U.S. dollars.

Payments will also be made using those two currencies instead of dollars. In the process, the Chinese have set up financial centers in nations such as Great Britain and Canada to start making loans denominated in the yuan.

In 2001, 72 percent of global foreign currency reserves held by central banks and governments were in U.S. dollars and Treasury debt. Dollars now make up only 62 percent of foreign exchange reserves.

Not too many years ago over 90 percent of international transactions were priced and paid in U.S. dollars. Within the past year, I see that figure has dropped to about 60 percent and is still declining.

According to SWIFT Watch, the U.S. Dollar is still far and away the number one currency used for international payments.

However, change is coming. In January 2012, the Chinese yuan was the 20th most used currency for international payments. Six month ago, the use of the yuan had vaulted to fifth most used. Only the U.S. dollar, euro, British pound and Japanese yen have greater volume for international payments.

When the London gold fix process was changed earlier this year, no Chinese bank elected to participate in the auction system. Since then the Bank of China (a “private” government-owned bank but not the central bank) has become a participant. The China Construction Bank (also government-owned but not a central bank) has now applied for direct participation in the auction.

The Shanghai Gold Exchange, which trades contracts paid for with the yuan, requires the delivery of physical gold to settle maturing contracts. It is currently negotiating to expand its global impact by becoming part of the contracts trades at the COMEX in New York and also a metals trading exchange in Dubai. If approved, as I expect, these contracts will requirement payments in yuan, not dollars.

The Chinese sponsored the creation of the Asian Infrastructure Investment Bank as a direct competitor to the World Bank. While the U.S. refuses to apply for membership in this bank and has applied enough pressure on Japan for it to decline applying for full membership, there are around 50 other nations (including many like France, Germany, Great Britain, Israel, Italy, the Philippines and Singapore that are considered U.S. allies) that have become members. Loans from this bank are almost certainly going to be mostly denominated in Chinese yuan.

Then, a few months ago, the Chinese government stated that it would like the yuan to become a component of the International Monetary Fund (IMF) Special Drawing Rights (SDR) when alterations to its makeup are considered in October. In order for the Chinese yuan to be added, the change must be accepted by three-fifths of the 188 member nations (113 countries) of the IMF and by nations with at least 85 percent of the IMF voting power.

As of late January, 146 member nations had approved the modification – more than needed to pass, but they only held 77.07 percent of the IMF voting power. What was the roadblock? The United States by itself holds 16 percent of the full IMF votes. Therefore, unless the U.S. government supports the change to the SDR composition, a change which would lead to a weaker U.S. dollar, the Chinese yuan will not be allowed to be part of the SDR formula.

It would be difficult for the U.S. government to justify a veto of the yuan being part of the SDR. Currently, only the four currencies used for a higher volume of international payments than the yuan – the U.S. dollar, euro, British pound and Japanese yen – are components of the SDR. However, volume in the yuan is growing so quickly that it will likely surpass that of the yen within a year or so. Another reason for the U.S. government to go along with adding the yuan to the SDR is that China has the financial clout – holding the largest amount of central bank reserves of any nation – to punish the value of the currency from any nation that blocks China’s efforts to expand international use of the yuan.

As the global use of the yuan expands, that will reduce the need for foreigners to hold U.S. dollars. As these excess dollars are returned to the U.S. Treasury to be redeemed for goods, services and ownership of American assets, there will be two effects. First, the U.S. Treasury will be forced to pay a higher interest rates to float its debt, which will increase the federal budget deficit. Second, as the value of the dollar deteriorates, that will inevitably lead to higher gold and silver prices.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His Numismatic Literary Guild award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).

More Collecting Resources

• Are you a U.S. coin collector? Check out the 2016 U.S. Coin Digest for the most recent coin prices.

• The Standard Catalog of United States Paper Money is the only annual guide that provides complete coverage of U.S. currency with today’s market prices.