China-Russia currency settlement and the dollar system
ERSIN ÇELIK,  Derin Ekonomi Magazine  Thursday 09:33, 09 November 2017
Arrangement of various world currencies including Chinese Yuan, US Dollar, Euro

Arrangement of various world currencies including Chinese Yuan, US Dollar, Euro

The Peoples’ Bank of China has announced a payment-versus-payment (PVP) system for Russian ruble and Chinese yuan transactions to reduce currency risks in their trade. The most likely risk these days of course would be from the U.S. Treasury, for financial warfare to damage Russian-Chinese trade which is becoming very significant in volume and value. By December it should reach a 30 percent rise over 2016. Yet there is more to this seeming technical move by China and Russia than meets the eye.

China plans to introduce similar PVP systems for yuan transactions with other currencies based on China’s Belt and Road initiative (BRI).

Earlier termed as the “New Economic Silk Road,” the BRI is the vast network of high-speed rail and port linkages being constructed crisscrossing the countries of Eurasia and extending to Iran, potentially to Turkey. HSBC estimates that the BRI, which encompasses countries generating almost one-third of global GDP, will produce an added $2.5 trillion of new trade annually.

The direct PVP currency settlement yuan-ruble, free from the dollar, is a key part of the most dynamic game-changing developments since Washington and Wall Street banks came up with the U.S. dollar system at Bretton Woods in 1944.

Bretton Woods ended

After President Nixon tore up the Bretton Woods Agreement in August 1971 to let the dollar float, free of redemption in gold, the world has had little choice but to accept inflated paper dollars. After 1971, world dollar supply has grown astronomically. Dollars in global circulation, no longer redeemable in gold, rose by 2,000 percent between 1971 and 2015. Production of real goods did not rise anywhere near 2,000 percent. For example global vehicle production rose little more than double in the time. The difference is inflated prices.

The fact that the dollar remains the most significant foreign central bank reserve currency, still 64 percent of all world reserves, gives the U.S. government an extraordinary advantage. Since 1971, the U.S. has run budget deficits for 41 of 45 years. In 2009 the U.S. deficit was $1,400 billion! In 1970 the U.S. deficit was $74 billion.

For other countries this is an enormous disadvantage. Their U.S. dollar treasury bond investments for their own central bank reserves are becoming worthless paper.

China and Russia, as well as Turkey, with their dollar reserves, finance the U.S. military budget by buying U.S. bonds and bills that allow the Treasury to finance that deficit without raising interest rates. The cynical irony is that the U.S. military budget is financed by other nations’ need to hold dollar reserves against potential currency wars by Washington.

If countries of Eurasia including Turkey and Iran turn to bilateral arrangements like China and Russia to settle trade, bypassing the U.S. dollar, the dollar domination as world reserve currency will decline. Other currencies will rise, with the gold-backed Chinese yuan and gold-backed Russian ruble leading the way.

Yuan reserve status

The new move to direct PVP settlement of bilateral trade between China and Russia is a major foundation stone in creation of a viable alternative to the U.S. dollar as an anchor reserve currency.

In 2016 China was admitted by the International Monetary Fund (IMF) as one of the five leading currency components of IMF Special Drawing Rights currency basket. That gave the yuan a major boost in international acceptance. Since 2012 the yuan or RMB has become the world’s fifth most widely used payment currency.

In October 2015, China initiated the China International Payments System (CIPS), an alternative in the event of possible future U.S. sanctions on China, to function independent of SWIFT, as Washington forced against Iran in 2012. In March, Elvira Nabiullina, governor of Russia’s central bank, stated: “We have finished working on our own payment system and if something happens, all operations in SWIFT format will work inside the country. We have created an alternative.”

A new currency architecture

In April 2016 China established the Shanghai Gold Exchange as a major international center for the pricing of gold and gold trading in yuan, with settlement in physical gold between bullion banks, refiners, producers and trading houses. Then China launched a daily yuan-denominated gold price fix that could soon displace the dominant London gold fix, a system that has been manipulating world gold prices downward for years.

In announcing its Belt Road Initiative the Chinese government declared that the routes of its high-speed railway projects, through the countries of Eurasia, will connect now remote, inaccessible regions known to have large unmined gold reserves, to the world markets via the BRI.

What China and Russia are doing is not about attacking the U.S. dollar to destroy it. That is highly unlikely and would benefit no one. It’s rather about creating an independent alternative reserve currency or currencies for other nations wanting to protect themselves from the ever-more frequent financial attacks by the U.S. Treasury and Wall Street banks and hedge funds--a gold-backed alternative.

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