Growing acceptance: A bank employee counting 100-yuan notes in Nantong, China’s eastern Jiangsu province. Usage of the currency has jumped in the past three months as international funds boosted holdings of Chinese government bonds. — AFP `
BEIJING: The Chinese yuan is making deeper inroads as a currency of choice for global payments, with international transactions climbing to their highest level ever. `
Payments using the currency jumped to a record 3.2% of market share, according to data from the Society for Worldwide Interbank Financial Telecommunications, breaking through its previous high set in 2015 that came on the back of a currency devaluation in a bid to increase exports. `
Usage has jumped in the past three months as international funds boosted holdings of Chinese government bonds, pushing their share to a fresh record, and amid gas producer Gazprom Neft’s decision to accept yuan rather than dollars for fuelling the Russian airplanes at China’s airports. `
The People’s Bank of China governor Yi Gang urged emerging economies to promote the use of local currencies at a Group-of-20 central banks’ gathering Wednesday, echoing a similar call from Indonesia to reduce reliance on the dollar to manage the risk of Federal Reserve’s stimulus withdrawal. `
The yuan will be one of the biggest beneficiaries as “trade between various Asian countries and China grows, and more of it is denominated in yuan,” said Alvin T. Tan, head of Asia FX strategy at Royal Bank of Canada in Hong Kong. `
Yuan’s growing popularity could also provide additional support for assets denominated in the currency, even as China’s yield premium over the United States narrows due to policy divergence between the two nations. She expects the yuan to be assigned a larger share in the International Monetary Fund’s reevaluation of Special Drawing Rights basket in July. `
The Regional Comprehensive Economic Partnership trade deal that deepens China’s regional foreign trade ties will also prompt member nations to raise yuan asset holdings due to further economic integration with China, she wrote in a note Wednesday. `
The currency retained its fourth place in the past two months, compared with being the 35th most-popular medium of exchange for payments in October 2010 when Swift, which handles cross-border payment messages for more than 11,000 financial institutions in 200 countries, started tracking. `
Despite its rise in the rankings and having upped its market share by orders of magnitude over the last 12 years, the yuan is still dwarfed in popularity by its more established peers, notably the US dollar and the euro. `
The dollar kept its top spot in January, a position it’s held since June, even though its market share fell to about 39.9% from 40.5% in December. `
The euro also lost ground but held onto second place, while the British pound and yen rounded out the top five in third and fifth place, respectively. — Bloomberg
China, France deepen RMB Cross-Border Interbank Payment System cooperation
The cooperation between China and France on the RMB
Cross-Border Interbank Payment System will help with
internationalization of the yuan and will also provide an opportunity
for the eurozone to reduce its reliance on the US dollar, experts said.
The currency’s correlation with an MSCI Inc index of its developing-nation peers rose to record in September on a weekly basis before edging back slightly amid the Omicron outbreak, Bloomberg data show.
`
BEIJING: The Chinese yuan is having a greater impact on its emerging-market counterparts than ever before and may play a crucial role in determining their performance in the coming year.
`
The currency’s correlation with an MSCI Inc index of its developing-nation peers rose to record in September on a weekly basis before edging back slightly amid the Omicron outbreak, Bloomberg data show.
`
While the close relationship is partly a result of China’s large weighting, it’s also been driven by the yuan’s links to the Brazilian real reaching the strongest since at least 2008, and that with India’s rupee touching a three-year high.The yuan’s rising global influence is yet another sign of China’s deepening connections across the world economy.
`
Investors are increasingly being drawn to its bonds as an alternative to United States Treasuries, while some banks are calling for the yuan to join the dollar, euro and yen as a global reserve currency.
`
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Yet with China’s potential being offset by murky policy making and regulatory crackdowns, being tied too closely to the yuan may also backfire.
`
“China is going to be a very important element of emerging-market stability and the growth picture,” said Magdalena Polan, principal economist at PGIM Ltd in London.
`
“The willingness for Chinese policy makers to stabilise growth will be very important to the outlook for Latam and Asia and South Africa, as countries there still rely quite a lot on exports from China.”
`
While correlations can be measured in many ways, China’s increasing presence in global trade has progressively boosted the yuan’s links with those of its emerging-market peers.
`
In 2000, the average developing nation sent only 2.2% of its exports to China, while that proportion has now grown to 11.3%, according to data from Societe Generale SA.
`
The investment bank says the yuan’s relative stability has traditionally made it most closely correlated with those of its emerging-market peers with strong and credible policy makers such as Mexico, Chile and South Korea.
`
Since the US-China trade war in 2018, however, the yuan’s links with emerging markets as a whole have grown stronger, with the average correlation rising to 83% that year, according to SocGen data.
`
There’s a risk of course that those very connections may also weigh on emerging-market currencies if the yuan begins to weaken. The major risk of that happening looks to be due to potential policy divergence, with the People’s Bank of China expected to ease monetary policy in 2022, just as central banks from the US, UK and Australia start to tighten.
`
The yuan will face a particular challenge as the Federal Reserve beings to raise borrowing costs, a move that is anticipated to lead to a stronger dollar and outflows from emergin
`g markets. Still, China’s currency has so far shown itself to be relatively resilient to monetary policy at home and abroad.
China’s economy has become an increasingly important influence on global growth over the past decade, and a vital one for emerging markets, according to JP Morgan Private Bank.
`
“Since the financial crisis, we’ve had mini cycles in global emerging markets, largely coincident in China’s property and credit cycle and since the crisis that has been the key driver of the outlook in emerging markets for the most part,” said Alexander Wolf, head of investment strategy, Asia, at JP Morgan Private Bank in Hong Kong.
`
The yuan’s relative resilience this year has also played a role in limiting fluctuations across emerging markets, in what has otherwise been a very tumultuous 12 months.
`
“The fact that the yuan’s not doing too much I categorise it as a volatility suppressant,” said Paul Mackel, head of global foreign-exchange research at HSBC Holdings Plc in Hong Kong. “We believe that stability can last for longer.” — Bloomberg
The dollar is central to the global monetary system – used worldwide as a unit of account, store of value and medium of exchange. Most commodity and forex contracts are denominated in it. It represents more than one-half of all cross-border interbank claims (a proxy for international payments). That’s five times US share of world goods imports, and three times its share of exports. About two-thirds of world reserves is held in US dollars.
https://youtu.be/kWNBDSj9O_I
https://youtu.be/jsDwMGH5E8U
Warning : China Started Dumping US Debt -- End Game for The Dollar !
https://youtu.be/rRFqy08Wnrg
THE END OF THE DOLLAR STANDARD | A WARNING FROM PETER SCHIFF
https://youtu.be/MeRWfRZp_rg
The yuan’s stability is partly by design, and by good luck; backed by foreign exchange reserves held steady at US$3.1 trillion since mid-2016.
TODAY, the world’s financial rhythm remains American. The US dollar assumed the role of the world’s dominant reserve, payment and settlement currency after WWII. The country’s position as the sole financial superpower gives it extraordinary influence over the destinies of nations.
For 70 years, the United States has used this power rather routinely, as a matter of reality. Of late, however, it has been engaged in “financial warfare” in the service of its foreign policy. This has prompted nations to “break free” of US dollar hegemony, including preventing “US sanctioned nations” free access to US dollar-based financial system with devastating impact.
The dollar is central to the global monetary system – used worldwide as a unit of account, store of value and medium of exchange. Most commodity and forex contracts are denominated in it. It represents more than one-half of all cross-border interbank claims (a proxy for international payments). That’s five times US share of world goods imports, and three times its share of exports. About two-thirds of world reserves is held in US dollars.
It is the preferred currency of central banks and capital markets (accounting for 65% of global securities issuance). The irony is people rushed to buy dollars during the subprime crash, even though Wall Street caused it. They did so again in March this year despite US bungled response to Covid19. The global finance plumbing is US dolarbased – most international transactions are ultimately cleared in US dollars through SWIFT (banks’ main cross-border messaging system) and CHIPS (Us-centric clearing house network) through New York by US “correspondent banks.”Denied access to this infrastructure, the institution is isolated and financially crippled. The United States began flexing its financial muscles (including imposing hefty penalties) after the terrorist attacks of September 2001.
Trump has since “weaponised” it to a new level – to-date, it has over 30 active financial and trade-sanctions programs. Early this year, it used this dominance to cut-off support to the Iran and Iraq regimes, adversely affecting their use of oil revenues.
This use of the dollar to extend its policy reach is “an abuse of power,” i.e. bullying; Russia refers to its use, a “political weapon.” Even allies (EU, Japan, UK) are concerned Trump is undermining US role in maintaining orderliness in global commerce and finance. There is already widespread talk to “dethrone” the US dollar, through the dedollarisation of assets; more use of domestic currencies in its trade workarounds and swaps; and new banking payments mechanisms and digital currencies.
Also, nations have expanded settlement of bilateral trade in their own currencies, or gold; even barter. Russia has gone the furthest, including dedollarising parts of its financial system; reducing US dollar share of its foreign reserves (40% to 24%); cutting its bank’s holdings of US dollar Treasuries to under Us$10bil from Us$100bil; bringing down its exports denominated in US dollar to 62%; and shifting US dollar trade with China and India to non-us dollar settlements; and denominating over 40% of its crude oil tenders in euros.
Like Russia, China has begun to set-up “building blocks” to become more autonomous, including a yuan-denominated crude oil futures contract (“petroyuan”) on the Shanghai exchange. US allies are flirting with it, too. But, EU first has to reform the inner workings of the euro and complete work on banking union, fiscal integration, etc., before it is ready to create a global electronic invoicing euro currency.
Reserves option
US dollar’s role as a reserve currency point to three distinct benefits: (i) lower transactions cost; (ii) macroeconomic policy flexibility, including foreign financing of its deficits; and (iii) leverage to benefit allies. Of course, it carries costs: (a) tends to hurt exports by being strong and stable; (b) overhang of debt overseas opens domestic economy as hostage to sudden capital movements; and (c) needs to bail-out the system.
That’s why the UK, Japan and Germany shied away. However, because the world has changed, EU has since started to push for a stronger international role for the euro. But becoming a serious reserve currency requires: (a) large, deep and liquid capital markets; (b) a secure bonds infrastructure, especially in government bonds; (c) wide use in world trade; and (d) a big economy that’s integrated into global markets.
Without fiscal union, EU lacks a supranational, liquid euro bond; its capital markets are not robust enough – a real banking union would help. Euro’s share of global reserves is down to 20%. Russia also tried – cuts US dollar share of its reserves to 24%. Issues most debt in roubles and euro; only 60% of its exports is settled in US dollars, and 40% of its oil sales contracts is denominated in euros. It has still a long way to go.
China had longed wish to internationalise. But, its capital controls remain a serious problem: it limits how much outsiders can access its currency. In 2017, Bond Connect was launched – allowing foreigners to invest in offshore bonds through Hong Kong, and scrapped investment quotas.
China has since made good progress: (i) offshore yuan deposits are rapidly rising; (ii) issues of yuan “dim-sum” bonds are getting popular; (iii) boom in forex transactions suggests growing usage, especially in hubs like Hong Kong, London, New York and Paris; (iv) more offshore investment products are denominated in yuan; and (v) Hong Kong today lists ETFS, gold futures and property investment trusts in addition to Chinese equity. China’s advances are global: it has a vast global trade and investment network; Chinese FDI is mainly in yuan; it settles 15% of its foreign trade in yuan. Today, more globally yuan payments are processed by banks.
One-fifth of European trade with China is settled in yuan, as is 55% of payments among them. Since 2018, yuan-denominated oil futures were launched in Shanghai, as are margin deposits on iron ore futures in Dalian. China’s commodity exchange is emerging. Most of all, central banks are warming up to the yuan – since inclusion in IMF’S SDR (a basket of five elite currencies), its share of global reserves has risen to 2.1%;
China has already signed currency swap arrangements with over 60 nations. Today, the “yuan bloc” accounts for 30% of global GDP – second only to US dollar (at 40%). China opened up its US$13 trillion bond market (world’s second largest), which accounts for 51% of all bonds issued by EMES.
Foreigners now hold 3% of this market and 9% of its government bonds. Its main attraction: good yields and diversification benefits. Further, the yuan has been among the most stable currencies in the world since mid-2016. Its real effective exchange rate – against the basket of currencies of its trading partners, adjusted for inflation – has risen by just 0.2% over the past four years. The yuan’s stability is partly by design, and by good luck; backed by foreign exchange reserves held steady at US$3.1 trillion since mid-2016.
New initiatives
US geopolitical rivals’ desire to escape the dollar dominance is real. In designing its new e-yuan, China wants a head start on the dollar; it is reported to be considering creating a common cryptocurrency with other BRICS nations (Brazil, Russia, India and South Africa). Similarly, on its part, EU is determined to encourage its members to eliminate “undue reference” to US dollars in payments and trade invoicing.
EU’S main initiative has involved Iran. It tried to create a way for its banks and firms to trade with it through Instex (a clearing house created for this purpose by Britain, France and Germany, with European Commission’s support) by-passing US dollars or SWIFT.
The stuttering performance of Instex reflects the sheer scope of the dollar reach: US claims jurisdiction if a transaction has any American “nexus,” even though not denominated in dollars. Despite this, more EU states are determined to join Instex. It’s EU’S intention to expand its financial reach – through a network of global electronic central bank digital monies that serves as a global invoicing currency, excluding US dollars. Also, its capital market needs greater depth and liquidity, key factors in choosing a currency for commerce. As Trump continues to use sanctions aggressively, efforts to circumvent them will accelerate. The reality is that US does not have a monopoly on financial ingenuity.
What then are we to do
There’s no question the world urgently needs a multinational currency reserve regime. The dollar is being weaponised to bully. This won’t do. Nations, including US allies, are looking for and working on an effective but viable and sustainable option. This will take time. The search is still very much work-in-progress. Euro and e-yuan look promising. But they have a way to go. Like it or not, any e-currency has to be central bank-backed to be credible, and where the public can readily access it.
Still, central banks face hurdles in offering dedicated digital currencies and related accounts to the public. Understandably, many central banks have been hesitant in creating digital currencies. As I see it, they remain worried on how to monitor transactions to prevent fraud and hacking, and whether digital currencies should be linked to interest rates. It’s a responsibility, I think, central banks really don’t want to take-up.
By Lin See Yan, Kuala Lumpur, June 22, 2020
Former banker, Harvard educated economist and British chartered scientist, Prof Lin of Sunway University is the author of “Trying Troubled Times Amid Trauma &Tumult, 2017–2019” (Pearson, 2019). Feedback is most welcome.
A dollar collapse is when the value of the U.S. dollar plummets. Anyone who holds dollar-denominated assets will sell them at any cost. That includes foreign governments who own U.S. Treasurys. It also affects foreign exchange futures traders. Last but not least are individual investors.
When the crash occurs, these parties will demand assets denominated in
anything other than dollars. The collapse of the dollar means that
everyone is trying to sell their dollar-denominated assets, and no one
wants to buy them. This will drive the value of the dollar down to near zero. It makes hyperinflation look like a day in the park.
Two Conditions That Could Lead to the Dollar Collapse
Two conditions must be in place before the dollar could collapse.
First, there must be an underlying weakness. As of 2017, the U.S.
currency was fundamentally weak despite its 25 percent increase since
2014. The dollar declined 54.7 percent against the euro between 2002 and 2012. Why? The U.S. debt almost tripled during that period, from $6 trillion to $15 trillion. The debt is even worse now, at $21 trillion, making the debt-to-GDP ratio
more than 100 percent. That increases the chance the United States will
let the dollar's value slide as it would be easier to repay its debt
with cheaper money.
Second, there must be a viable currency alternative for everyone to buy. The dollar's strength is based on its use as the world's reserve currency. The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard. As a global currency, the dollar is used for 43 percent of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions. As a result, 61 percent of these foreign currency reserves are in dollars.
Note: The next most popular currency after the dollar is the euro. But it comprises less than 30 percent of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.
China and
others argue that a new currency should be created and used as the
global currency. China's central banker Zhou Xiaochuan goes one step
further. He claims that the yuan should replace the dollar to maintain China's economic growth.
China is right to be alarmed at the dollar's drop in value. That's
because it is the largest foreign holder of U.S. Treasury, so it just
saw its investment deteriorate. The dollar's weakness makes it more
difficult for China to control the yuan's value compared to the dollar.
Could bitcoin replace the dollar as the new world currency? It has many benefits. It's not controlled by any one country's central bank.
It is created, managed, and spent online. It can also be used at
brick-and-mortar stores that accept it. Its supply is finite. That
appeals to those who would rather have a currency that's backed by
something concrete, such as gold.
But there are big obstacles. First, its value is highly volatile. That's because there is no central bank to manage it. Second, it has become the coin of choice for illegal activities that lurk in the deep web. That makes it vulnerable to tampering by unknown forces.
Economic Event to Trigger the Collapse
These two situations make a collapse possible. But, it won’t occur
without a third condition. That's a huge economic triggering event that
destroys confidence in the dollar.
Altogether, foreign countries own more than $5 trillion in U.S. debt. If China, Japan or
other major holders started dumping these holdings of Treasury notes on
the secondary market, this could cause a panic leading to
collapse. China owns $1 trillion in U.S. Treasury. That's because China pegs the yuan to
the dollar. This keeps the prices of its exports to the United
States relatively cheap. Japan also owns more than $1 trillion in
Treasurys. It also wants to keep the yen low to stimulate exports to the United States.
Japan is trying to move out of a 15-year deflationary cycle. The 2011 earthquake and nuclear disaster didn't help.
Would China and Japan ever dump their dollars? Only if they saw their holdings declining in value too fast and they had another export
market to replace the United States. The economies of Japan and China
are dependent on U.S. consumers. They know that if they sell their
dollars, that would further depress the value of the dollar. That means
their products, still priced in yuan and yen, will cost relatively more
in the United States. Their economies would suffer. Right now, it's
still in their best interest to hold onto their dollar reserves.
Note: China and Japan are aware of their vulnerability. They are selling more
to other Asian countries that are gradually becoming wealthier. But the
United States is still the best market (not now) in the world.
When Will the Dollar Collapse?
It's unlikely that it will collapse at all. That's because any of the
countries who have the power to make that happen (China, Japan, and
other foreign dollar holders) don't want it to occur. It's not in their
best interest. Why bankrupt your best customer? Instead, the dollar will
resume its gradual decline as these countries find other markets.
Effects of the Dollar Collapse
A sudden dollar collapse would create global economic turmoil.
Investors would rush to other currencies, such as the euro, or other
assets, such as gold and commodities. Demand for Treasurys would plummet, and interest rates would rise. U.S. import prices would skyrocket, causing inflation.
U.S. exports would be dirt cheap, given the economy a brief boost. In the long run, inflation, high interest rates, and volatility would strangle possible business growth. Unemployment would worsen, sending the United States back into recession or even a depression.
How to Protect Yourself
Protect yourself from a dollar collapse by first defending yourself from a gradual dollar decline.
A dollar collapse would create global economic turmoil. To respond to
this kind of uncertainty, you must be mobile. Keep your assets liquid,
so you can shift them as needed. Make sure your job skills are
transferable. Update your passport, in case things get so bad for so
long that you need to move quickly to another country. These are just a
few ways to protect yourself and survive a dollar collapse.
The U.S. trade deficit with China
was $375 billion in 2017. The trade deficit exists because U.S. exports
to China were only $130 billion while imports from China were $506
billion.
The United States imported
from China $77 billion in computers and accessories, $70 billion in
cell phones, and $54 billion in apparel and footwear. A lot of these
imports are from U.S. manufacturers that send raw materials to China for
low-cost assembly. Once shipped back to the United States, they are
considered imports.
In 2017, China imported
from America $16 billion in commercial aircraft, $12 billion in
soybeans, and $10 billion in autos. In 2018, China canceled its soybean
imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods.
Current Trade Deficit
As of July 2018, the United States exported a total of $74.3 billion
in goods to China. It imported $296.8 billion, according to the U.S. Census Bureau. As a result, the total trade deficit with China is $222.6 billion. A monthly breakdown is in the chart.
Monthly U.S. Trade Deficit With China From January to July 2018
China can produce many consumer goods at lower costs than other
countries can. Americans, of course, want these goods for the lowest
prices. How does China keep prices so low? Most economists agree that
China's competitive pricing is a result of two factors:
A lower standard of living, which allows companies in China to pay lower wages to workers.
An exchange rate that is partially fixed to the dollar.
If the United States implemented trade protectionism, U.S. consumers
would have to pay high prices for their "Made in America" goods. It’s
unlikely that the trade deficit will change. Most people would rather
pay as little as possible for computers, electronics, and clothing, even
if it means other Americans lose their jobs.
China is the world's largest economy.
It also has the world's biggest population. It must divide its
production between almost 1.4 billion residents. A common way to measure
standard of living is gross domestic product per capita. In
2017, China’s GDP per capita was $16,600. China's leaders are
desperately trying to get the economy to grow faster to raise the
country’s living standards. They remember Mao's Cultural Revolution all
too well. They know that the Chinese people won't accept a lower
standard of living forever.
China sets the value of its currency, the yuan, to equal the value of a basket of currencies that includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasurys to
support it. In 2016, China began relaxing its peg. It wants market
forces to have a greater impact on the yuan's value. As a result, the dollar to yuan conversion has been more volatile since then. China's influence on the dollar remains substantial.
Effect
China must buy so many U.S. Treasury notes that it is the largest
lender to the U.S. government. Japan is the second largest. As
of September 2018, the U.S. debt to China was $1.15 trillion. That's 18 percent of the total public debt owned by foreign countries.
Many are concerned that this gives China political leverage over
U.S. fiscal policy. They worry about what would happen if China started
selling its Treasury holdings. It would also be disastrous if China
merely cut back on its Treasury purchases.
Why are they so worried? By buying Treasurys, China helped keep
U.S. interest rates low. If China were to stop buying Treasurys, interest rates would rise.
That could throw the United States into a recession. But this wouldn’t
be in China's best interests, as U.S. shoppers would buy fewer
Chinese exports. In fact, China is buying almost as many Treasurys
as ever.
U.S. companies that can't compete with cheap Chinese goods must
either lower their costs or go out of business. Many businesses reduce
their costs by outsourcing jobs to
China or India. Outsourcing adds to U.S. unemployment. Other industries
have just dried up. U.S. manufacturing, as measured by the number of
jobs, declined 34 percent between 1998 and 2010. As these industries
declined, so has U.S. competitiveness in the global marketplace
.
What's Being Done
President Trump promised to lower the trade deficit with China.
On March 1, 2018, he announced he would impose a 25 percent tariff on
steel imports and a 10 percent tariff on aluminum. On July 6, Trump's
tariffs went into effect for $34 billion of Chinese imports. China
canceled all import contracts for soybeans.
Trump's tariffs have raised the costs of imported steel, most of
which is from China. Trump's move comes a month after he imposed tariffs
and quotas on imported solar panels and washing machines. China has
become a global leader in solar panel production. The tariffs depressed
the stock market when they were announced.
The Trump administration is developing further anti-China protectionist measures,
including more tariffs. It wants China to remove requirements that U.S.
companies transfer technology to Chinese firms. China requires
companies to do this to gain access to its market.
Trump also asked China to do more to raise its currency. He claims
that China artificially undervalues the yuan by 15 percent to 40
percent. That was true in 2000. But former Treasury Secretary Hank Paulson initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People's Bank of China to strengthen the yuan's value against the dollar.
It increased 2 to 3 percent annually between 2000 and 2013.
U.S. Treasury Secretary Jack Lew continued the dialogue during the Obama administration.
The Trump administration continued the talks until they stalled in July 2017.
The dollar strengthened 25
percent between 2013 and 2015. It took the Chinese yuan up with it.
China had to lower costs even more to compete with Southeast Asian
companies. The PBOC tried unpegging the yuan from the dollar in 2015.
The yuan immediately plummeted. That indicated that the yuan was
overvalued. If the yuan were undervalued, as Trump claims, it would have
risen instead.
A dollar collapse is when the value of the U.S. dollar plummets. Anyone who holds dollar-denominated assets will sell them at any cost. That includes foreign governments who own U.S. Treasurys. It also affects foreign exchange futures traders. Last but not least are individual investors.
When the crash occurs, these parties will demand assets denominated in anything other than dollars. The collapse of the dollar means that everyone is trying to sell their dollar-denominated assets, and no one wants to buy them. This will drive the value of the dollar down to near zero. It makes hyperinflation look like a day in the park.
Two Conditions That Could Lead to the Dollar Collapse
Two conditions must be in place before the dollar could collapse. First, there must be an underlying weakness. As of 2017, the U.S. currency was fundamentally weak despite its 25 percent increase since 2014. The dollar declined 54.7 percent against the euro between 2002 and 2012. Why? The U.S. debt almost tripled during that period, from $6 trillion to $15 trillion. The debt is even worse now, at $21 trillion, making the debt-to-GDP ratio more than 100 percent. That increases the chance the United States will let the dollar's value slide as it would be easier to repay its debt with cheaper money.
Second, there must be a viable currency alternative for everyone to buy. The dollar's strength is based on its use as the world's reserve currency. The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard. As a global currency, the dollar is used for 43 percent of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions. As a result, 61 percent of these foreign currency reserves are in dollars.
Note: The next most popular currency after the dollar is the euro. But it comprises less than 30 percent of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.
China and others argue that a new currency should be created and used as the global currency. China's central banker Zhou Xiaochuan goes one step further. He claims that the yuan should replace the dollar to maintain China's economic growth. China is right to be alarmed at the dollar's drop in value. That's because it is the largest foreign holder of U.S. Treasury, so it just saw its investment deteriorate. The dollar's weakness makes it more difficult for China to control the yuan's value compared to the dollar.
Could bitcoin replace the dollar as the new world currency? It has many benefits. It's not controlled by any one country's central bank. It is created, managed, and spent online. It can also be used at brick-and-mortar stores that accept it. Its supply is finite. That appeals to those who would rather have a currency that's backed by something concrete, such as gold.
But there are big obstacles. First, its value is highly volatile. That's because there is no central bank to manage it. Second, it has become the coin of choice for illegal activities that lurk in the deep web. That makes it vulnerable to tampering by unknown forces.
Economic Event to Trigger the Collapse
These two situations make a collapse possible. But, it won’t occur without a third condition. That's a huge economic triggering event that destroys confidence in the dollar.
Altogether, foreign countries own more than $5 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse. China owns $1 trillion in U.S. Treasury. That's because China pegs the yuan to the dollar. This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasurys. It also wants to keep the yen low to stimulate exports to the United States.
Japan is trying to move out of a 15-year deflationary cycle. The 2011 earthquake and nuclear disaster didn't help.
Would China and Japan ever dump their dollars? Only if they saw their holdings declining in value too fast and they had another export market to replace the United States. The economies of Japan and China are dependent on U.S. consumers. They know that if they sell their dollars, that would further depress the value of the dollar. That means their products, still priced in yuan and yen, will cost relatively more in the United States. Their economies would suffer. Right now, it's still in their best interest to hold onto their dollar reserves.
Note: China and Japan are aware of their vulnerability. They are selling more to other Asian countries that are gradually becoming wealthier. But the United States is still the best market (not now) in the world.
When Will the Dollar Collapse?
It's unlikely that it will collapse at all. That's because any of the countries who have the power to make that happen (China, Japan, and other foreign dollar holders) don't want it to occur. It's not in their best interest. Why bankrupt your best customer? Instead, the dollar will resume its gradual decline as these countries find other markets.
Effects of the Dollar Collapse
A sudden dollar collapse would create global economic turmoil. Investors would rush to other currencies, such as the euro, or other assets, such as gold and commodities. Demand for Treasurys would plummet, and interest rates would rise. U.S. import prices would skyrocket, causing inflation.
U.S. exports would be dirt cheap, given the economy a brief boost. In the long run, inflation, high interest rates, and volatility would strangle possible business growth. Unemployment would worsen, sending the United States back into recession or even a depression.
How to Protect Yourself
Protect yourself from a dollar collapse by first defending yourself from a gradual dollar decline.
A dollar collapse would create global economic turmoil. To respond to this kind of uncertainty, you must be mobile. Keep your assets liquid, so you can shift them as needed. Make sure your job skills are transferable. Update your passport, in case things get so bad for so long that you need to move quickly to another country. These are just a few ways to protect yourself and survive a dollar collapse.
The U.S. trade deficit with China was $375 billion in 2017. The trade deficit exists because U.S. exports to China were only $130 billion while imports from China were $506 billion.
The United States imported from China $77 billion in computers and accessories, $70 billion in cell phones, and $54 billion in apparel and footwear. A lot of these imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.
In 2017, China imported from America $16 billion in commercial aircraft, $12 billion in soybeans, and $10 billion in autos. In 2018, China canceled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods.
Current Trade Deficit
As of July 2018, the United States exported a total of $74.3 billion in goods to China. It imported $296.8 billion, according to the U.S. Census Bureau. As a result, the total trade deficit with China is $222.6 billion. A monthly breakdown is in the chart.
Monthly U.S. Trade Deficit With China From January to July 2018
China can produce many consumer goods at lower costs than other countries can. Americans, of course, want these goods for the lowest prices. How does China keep prices so low? Most economists agree that China's competitive pricing is a result of two factors:
A lower standard of living, which allows companies in China to pay lower wages to workers.
An exchange rate that is partially fixed to the dollar.
If the United States implemented trade protectionism, U.S. consumers would have to pay high prices for their "Made in America" goods. It’s unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics, and clothing, even if it means other Americans lose their jobs.
China is the world's largest economy. It also has the world's biggest population. It must divide its production between almost 1.4 billion residents. A common way to measure standard of living is gross domestic product per capita. In 2017, China’s GDP per capita was $16,600. China's leaders are desperately trying to get the economy to grow faster to raise the country’s living standards. They remember Mao's Cultural Revolution all too well. They know that the Chinese people won't accept a lower standard of living forever.
China sets the value of its currency, the yuan, to equal the value of a basket of currencies that includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasurys to support it. In 2016, China began relaxing its peg. It wants market forces to have a greater impact on the yuan's value. As a result, the dollar to yuan conversion has been more volatile since then. China's influence on the dollar remains substantial.
Effect
China must buy so many U.S. Treasury notes that it is the largest lender to the U.S. government. Japan is the second largest. As of September 2018, the U.S. debt to China was $1.15 trillion. That's 18 percent of the total public debt owned by foreign countries.
Many are concerned that this gives China political leverage over U.S. fiscal policy. They worry about what would happen if China started selling its Treasury holdings. It would also be disastrous if China merely cut back on its Treasury purchases.
Why are they so worried? By buying Treasurys, China helped keep U.S. interest rates low. If China were to stop buying Treasurys, interest rates would rise. That could throw the United States into a recession. But this wouldn’t be in China's best interests, as U.S. shoppers would buy fewer Chinese exports. In fact, China is buying almost as many Treasurys as ever.
U.S. companies that can't compete with cheap Chinese goods must either lower their costs or go out of business. Many businesses reduce their costs by outsourcing jobs to China or India. Outsourcing adds to U.S. unemployment. Other industries have just dried up. U.S. manufacturing, as measured by the number of jobs, declined 34 percent between 1998 and 2010. As these industries declined, so has U.S. competitiveness in the global marketplace .
What's Being Done
President Trump promised to lower the trade deficit with China. On March 1, 2018, he announced he would impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. On July 6, Trump's tariffs went into effect for $34 billion of Chinese imports. China canceled all import contracts for soybeans.
Trump's tariffs have raised the costs of imported steel, most of which is from China. Trump's move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines. China has become a global leader in solar panel production. The tariffs depressed the stock market when they were announced.
The Trump administration is developing further anti-China protectionist measures, including more tariffs. It wants China to remove requirements that U.S. companies transfer technology to Chinese firms. China requires companies to do this to gain access to its market.
Trump also asked China to do more to raise its currency. He claims that China artificially undervalues the yuan by 15 percent to 40 percent. That was true in 2000. But former Treasury Secretary Hank Paulson initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People's Bank of China to strengthen the yuan's value against the dollar. It increased 2 to 3 percent annually between 2000 and 2013. U.S. Treasury Secretary Jack Lew continued the dialogue during the Obama administration.
The Trump administration continued the talks until they stalled in July 2017.
The dollar strengthened 25 percent between 2013 and 2015. It took the Chinese yuan up with it. China had to lower costs even more to compete with Southeast Asian companies. The PBOC tried unpegging the yuan from the dollar in 2015. The yuan immediately plummeted. That indicated that the yuan was overvalued. If the yuan were undervalued, as Trump claims, it would have risen instead.
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