Finance

China Pulls the Plug on the US Dollar

China Pulls the Plug on the US Dollar

Things are moving fast in China.

The Chinese government is rushing to implement a series of changes to its currency before the coming global monetary reset.

This reset has the US dollar firmly in the crosshairs.

Once in play, it will signal the end of the Bretton Woods agreement that has defined the global monetary system for 75 years. And with it the end of the US dollar as the world’s sole reserve currency. National currencies won’t disappear, but the US dollar’s hegemony will.

Providing liquidity in its place will be the International Monetary Fund’s Special Drawing Right, which has been earmarked to replace the dollar as reserve currency. The SDR is simply an international reserve asset created to supplement member countries’ official reserves.

Over the past fortnight, we’ve seen two developments from China that suggest we may be less than five years away from this reset.

We reported last week on China’s launching of oil futures contracts. Rightly, this was interpreted as an important step in the internationalisation of the yuan.

Yet it was merely an appetiser for what came next…

The real reason China wants to trade oil in yuan

China announced a pilot program beginning later this year to purchase imported oil in yuan. It wants to create a benchmark equal to Brent and West Texas Intermediate. It also wants to reduce its dependency on the US dollar in oil trade.

Yet this move was only partly about China weaning itself of US-dollar dependency.

After all, the yuan is not going to replace the US dollar as the reserve currency on its own. That isn’t China’s intention anyway. Not least because the yuan has a massive liquidity problem.

An estimated 90% of transactions in currency markets involve the use of the US dollar. Compared to 4% for the yuan, the gap is too vast for any serious challenge to the dollar’s dominance.

Rather, the push to allow oil trading in yuan is meant to boost the international use and appeal of China’s currency. This is unfolding now because China realises that the next monetary crisis is around the corner.

You’d think China’s moves towards de-dollarisation would alarm the US. After all, the US benefits greatly from the dollar’s reserve currency status. Yet it’s not.

Why?

The IMF provides the biggest clue.

The yuan was admitted to the IMF’s Special Drawing Right basket in 2016.

This basket is made up of only five currencies. It includes the US dollar, euro, yen, pound, and yuan.

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