Although context is key in most cases, sometimes it helps to assess news flow out of context in order to discern whether the prevailing zeitgeist makes any sense.
While it’s eminently plausible that the Chinese yuan will one day challenge the US dollar, it’s not imminently plausible, for a laundry list of reasons outlined in these pages on too many occasions to count.
A few smart people (and one very smart person) have suggested recently that a transition to a yuan-dominated system of global finance and trade is right around the corner, hastened by the West’s purportedly ill-advised decision to cut one of the world’s foremost exporters of commodities off from the global financial system.
When you assess such claims (implicit or explicit) you should note two things immediately. First, Russia is still exporting energy and receiving hard currency in return, an awkward conjuncture (under the circumstances) that’s in no small part responsible for the ruble’s resilience and is at the heart of an increasingly bitter dispute in Brussels about the urgency of doing something for Ukraine that actually matters. In short: The gas is still flowing to Europe.
Second, if the suggestion is that the yuan is making “inroads,” we’re using a pretty loose definition of the term. The figure (below) is current using the latest available data from SWIFT’s “RMB tracker.” After peaking in January at 3.2%, CNY’s share of global payments by value dropped to 2.23% in February.
Outside of the euro area, the yuan barley counts. The ex-eurozone figure is 1.43%, less than the Aussie and the Loonie.
It’s the same story with FX reserves. Last month, the Global Times trumpeted “a new high” in allocated CNY reserves. That “high”: A whopping 2.79%.
Yes, the dollar’s share is near a 25-year low, but the greenback’s “demise” has been the euro’s gain (figure below). That doesn’t do much to advance anyone’s “new world order” thesis.
For what it’s worth, SWIFT’s figures on trade financing are barely worth mentioning. The dollar’s share of the trade finance market was 87% in February. The euro was a “close” second with 6.3%. The yuan was third, but third in this case means 1.8%. In 2019, the dollar accounted for almost 90% of FX transactions, according to the BIS. The yuan’s share of that pie: 4.3%.
That brings me back to the point made here at the outset. If you didn’t know the context, what do the two simple charts above seem to be saying about the yuan? It’s rarely used and nobody wants it.
Sure, that’s a wholly ignorant assessment for those of us steeped in the debate, but the vast majority of humanity doesn’t concern themselves with such pontificating, primarily because they’re too busy going about their daily lives, where, economically speaking, that means transacting in, and trying to accumulate, dollars and euros.
Meanwhile, the financial media continues to press ahead with stories that suggest the “new monetary world order” is coming true. And it is. One coal shipment at a time.
“Several Chinese firms used local currency to buy Russian coal in March, and the first cargoes will arrive this month,” Bloomberg declared on Thursday, citing Fenwei Energy Information Service Co, which, according to itself, is “China’s most reputable” coal industry consultant. The same article noted that cargoes of Russian crude paid for in yuan are also set for delivery soon.
Of course, it’s easy to sell oil to countries that have no qualms about buying contraband when what you’re selling is available at discounts so large that they’d be misprints if you didn’t know the context.
And there again we see the utility of pretending to know nothing in order to get at the truth. Imagine Russian troops never amassed on Ukraine’s borders. Now imagine someone told you the secret to the future of global commerce is hiding in a bin of Russian coal paid for in a currency with Mao’s face on it.
Everyone will have their date. For me the dollar died on February 11, 2022 when the US took over Afghan reserves and distributed over 50% to Americans. That day I decided to move some assets to a non-US jurisdiction and diversify away from the dollar. How is it going? Slow. I haven’t figured out what to do, but where there is a will, there is a way. It will take years, if not decades, but in 10 years I will have a sizable portion of my assets outside of immediate US control. I have a feeling I’m not alone.
“No currency is born a reserve currency, it becomes it.” -Zoltan Pozsar
It’s hilarious that people quote these folks like they’re Aristotle or Thomas Aquinas.
You’re the one that called him, “one very smart person.”
About 12 years ago I had a colleague who was very conservative . . . an Opus Dei kind of guy. We had both been Navy SEAL officers, and we were both working for the Naval Special Warfare Command in Coronado, CA. I was a contractor, and he was a GS.
His story was a bit different from mine. Whereas I had spent my entire career in the SEAL community, he had crossed over into Navy meteorolgy at some point early on. So he was considered a “technology” kind of guy, and he was there working certain classified technology issues.
One day I asked him about climate change and sea level rise. Being as conservative as he was, I figured I would not get any bullshit the-sky-is-falling hyperbole from him.
He drew a chart on the whiteboard that looked like the S&P 500 over a period of several decades. Basically going up, but in a sort of jagged manner, and with a few significant dips here and there.
He said that sea level rise was like the stock market . . . it keeps going up. Yes, there are some years or whatever when it seems to go down, but the general trend has been—and will continue to be—up. And he went on to say that if you own waterfront property on the ocean, in 50 years it will probably be underwater to some degree, making it useless.
But the thing he said that really got my attention was this: he said that even though the land would be useless in 50 years, the trend and ultimate fate would be so obvious in 25 years that—in 25 years—the land would be worthless.
Rightly or wrongly, that particular notion has informed my thoughts about the dollar. It may be years or decades before the dollar looses it’s hegemonic status to the point that we can actually consider ourselves in an entirely new world order, but it’s possible that at some point long before that the trend and ultimate outcome will be clear enough to make owning and living on dollars—especially overseas, where I live now—a somewhat undesirable situation.
I pay pretty close attention to all the arguments about the dollar. For a lot of reasons—many outlined in this post—I’m not too worried about it significantly losing its status in the near term. But I do keep my eye on it, and keep an eye out for that moment when perception overtakes reality.
Interesting career and interesting colleague. He didn’t get the memo on “conservatives don’t believe in climate change and, if they do, God wills it”?
Frankly, the US is the best world policeman we can hope for. It’s not above making mistakes or indeed terrible hubristic moral high ground shattering ones like the Iraq invasion but, if my choice is between the US and China, the US wins my vote every time. Even the Vietnamese agree!
So I think the USD is safe. It won’t be CNY or RUB that takes it down. Not now and not in the future.