R.I.P U.S. DOLLAR
1. Germany ditching U.S. dollar
Yuan Offshore Trade Race Picks Up With Frankfurt Bid: Currencies
The race is on to corner the overseas trade in China’s yuan, with an organization that represents Frankfurt’s financial industry predicting the European Central Bank will get a swap deal valued at four times that obtained last week by the U.K.
The ECB, based in the German finance capital, may obtain a swap agreement with the People’s Bank of China valued as much as 800 billion yuan ($130 billion), according to lobby group Frankfurt Main Finance. A deal would give euro-area central banks access to yuan funds to backstop companies doing business in the world’s second-largest economy, and would dwarf the 200 billion-yuan agreement signed June 24 by the Bank of England.
Policy makers and bankers are meeting with companies from carmaker Volkswagen AG (VOW) to industrial-gas producer Messer Group GmbH in Frankfurt today to discuss establishing the city as an offshore yuan-trading center. It’s the latest chapter in China’s push for greater use of its currency outside the mainland.
“This has been an issue for our clients for years,” Dirk Schmitz, co-head of the German investment-banking arm of Deutsche Bank AG, the biggest currency trader, said in a phone interview. “German companies have a good commercial relationship with China. Companies often come to us to ask for hedging.”
A swap agreement would see the ECB put up euros in exchange for the Chinese currency, which it could then lend to companies.
An ECB official, who asked not to be identified, declined to comment on the talks, saying this was in line with the central bank’s policy.
Germany is China’s biggest trading partner in Europe. By 2015, a third of the Asian country’s cross-border business will be settled in yuan, making the currency the third most-traded after the U.S. dollar and euro, according to HSBC Holdings Plc, Britain’s biggest lender, which has its origins in 19th-century Hong Kong and China.
The three-year swap agreement that BOE Governor Mervyn King signed with his Chinese counterpart Zhou Xiaochuan last month is half the size of Hong Kong’s 400 billion-yuan deal. The accords provide companies with a safety net that aims to give them more confidence in doing business with their Chinese partners.
GEA Group AG (G1A), the Dusseldorf-based supplier of technology to food and energy companies in countries including China, is among Germany’s small- and medium-sized companies that stand to gain from Frankfurt’s push for a yuan-swap agreement.
“The free convertibility would speed up business and make transactions more secure,” Chief Financial Officer Helmut Schmale said in an interview at the company’s plant in Oelde, Germany, on June 27. “China has always been a growth market for us and will remain such for the foreseeable future. In a few years, the yuan will become the third global currency, with the dollar and euro.”
Sales from GEA’s China business grew to 556 million euros ($720 million) last year, or 10 percent of its total, according to Schmale. Its employees in the country increased 15 percent to 2,431 in December compared with a year earlier, he said.
China’s yuan climbed to a record 6.1210 per dollar on May 27 and closed at 6.1308 in Hong Kong today. The 12-month non-deliverable forwards fell 0.1 percent to 6.302 per dollar at 2:51 p.m. in London.
The yuan is the only major currency apart from Israel’s shekel to strengthen against its U.S. counterpart this year, gaining 1.6 percent.
Frankfurt is basing its push for the offshore yuan business on Germany’s close ties with China, the nation’s third-biggest trading partner. The two countries imported and exported goods and services worth 144 billion euros between them last year, according to the Federal Statistics Office in Wiesbaden, Germany.
“The high level of interaction between China’s and Germany’s real economies highlights the necessity for a more active renminbi trade, perhaps even using Germany as a hub,” Joachim Nagel, a Bundesbank board member, said in a speech at today’s conference. “Given China’s growing economic importance, the internationalization of the renminbi seems long overdue.”
Transactions in yuan jumped to 8.2 percent of trade deals between Germany and China in May, the biggest month-on-month increase among 20 nations using the Chinese currency, according to the Society for Worldwide Interbank Financial Telecommunication. The Belgium-based group, known as Swift, provides messaging services to banks.
2. Canada ditching U.S. Dollar
Toronto Reviews Bid to Become Yuan Currency Trading Hub
Canada’s banks are considering a plan to make Toronto the first North American trading hub for China’s yuan, joining a global race for a share of trading in the currency of the world’s second-largest economy.
Some of Canada’s largest banks, insurance companies and pension funds met with government representatives and the Bank of Canada in Toronto on June 21 to discuss establishing a yuan trading hub, according to the Toronto Financial Services Alliance, an industry group that set up the meeting. Representatives of Chinese banks also attended the meeting, the group said, declining to name them.
“There’s been expressions of interest from some companies,” said Janet Ecker, president of the finance group, who attended the meeting. “We’ve seen what’s happened in London and Singapore and Hong Kong.”
The moves to set up a trading hub in Canada come as an organization representing Frankfurt’s financial industry predicts the European Central Bank is nearing a deal with China that will help the German financial center become a European yuan trading hub.
The Bank of England signed a similar but smaller agreement last month, joining other recent additions like Australia, Turkey, Brazil and South Korea as China pushes for greater use of its currency outside the mainland. To have a trading hub, a country’s central bank must have an agreement with China’s central bank to swap its currency for yuan.
3. Switzerland ditching U.S. dollar
Switzerland Will Join Race to Be Trading Hub for China’s Yuan
Switzerland plans to bid to become an offshore yuan trading center in Europe, competing with Frankfurt and London to corner trade in the Chinese currency.
“It is in Swiss interest to have a renminbi hub in the center of Europe,” Economy Minister Johann Schneider-Ammann said in Beijing today after signing a free trade agreement with Chinese Commerce Minister Gao Hucheng. While no official talks have taken place, Schneider-Ammann said he hopes the idea will become “more serious” in the coming weeks or months.
Leaders of the world’s second-largest economy are promoting greater use of the yuan in international trade and finance to decrease the country’s dependence on the U.S. dollar and move toward making the currency convertible for investment purposes. Zurich is vying with London, Paris and Frankfurt for the top spot in Europe, while Canadian banks are considering a plan to make Toronto the first North American trading hub.
“The Swiss side, the Swiss financial system, in particular the Swiss National Bank, we are interested in getting the chance to negotiate with the Chinese about a renminbi hub in the center of Europe, in Switzerland,” Schneider-Ammann said, using another term for the yuan.
London, the center of the world’s $4 trillion-a-day market for foreign-exchange trading, claims to have the edge in Europe after the Bank of England signed a three-year currency swap line with the People’s Bank of China last month, becoming the first among European central banks to establish such a facility with the Asian nation.
4. UK ditched U.S. dollar
The Bank of England and its Chinese counterpart have signed a deal likely to boost trade between the UK and China in the yuan.
The Bank and the People's Bank of China have signed a three-year currency swap arrangement worth 200bn yuan (£21bn, $33bn), the UK central bank confirmed.
The UK is looking to become a centre for the Chinese currency, also known as the renminbi.
British banks hold 35bn yuan worth of deposits in the Chinese currency.
Currency-swap agreements allow central banks to swap currencies and can be used by firms to settle trade in local currencies rather than in US dollars, as happens now, since China's currency is not fully convertible to other currencies.
Practically the whole world has abandoned the American system for international trade. This will be a far bigger shock for the U.S. economy than Great Depression.