China, the only country with enough weight to challenge U.S. financial hegemony, has just announced through its People’s Bank a payment versus payment, PVP, system for transactions in Russian rubles and Chinese yuans so as to reduce the influence of the U.S. dollar on international transactions.
The grand design behind the One Belt, One Road Initiative, ICR, has an integral gold-based currency component that could change the balance of global power in favor of the Eurasian nations, from Russia and the Eurasian Economic Union, EAEU, countries to China and all of Asia.
The war dollar – bad business
The trade between China and Russia in their own currencies, bypassing the dollar, has become significant ever since the U.S. sanctioned Russia over the 2014 crisis in Ukraine, described by some as a very clumsy move by the Obama administration.
Since 1945, it has been well known that the U.S. world superpower status has been based on two pillars: the world’s most powerful military and the dollar as the world’s unchallenged reserve currency, which allows it to control the global economy. Since 1944 when all other currencies were linked to the dollar, the U.S. dollar began its ascendancy as the benchmark currency held by the world’s central banks. This linkage was reinforced by the fact that the OPEC countries agreed to sell their oil in dollars and that most global trade is financed in dollars.
The U.S. dollar continues being the most important reserve currency. Currently 64 percent of the world’s financial reserves are still held in U.S. dollars with the Euro its closest rival at 20 percent. This gives the U.S. government an extraordinary advantage.
The U.S. has run a budget deficit in 41 of the last 45 years. This is a big disadvantage for many countries because their own central bank investments in U.S. Treasury bonds lose value. But they are more or less obliged to invest U.S. dollars they earn from their export surpluses, for example China’s central bank’s annual flow of U.S. dollars, or the U.S. dollars of Japan’s trade surplus, or Russia’s prior to 2014, or Germany and other countries with a trade surplus. This allows the United States to keep its interest rates low and to finance its budget and trade deficits relatively easily. This year the U.S. budget deficit reached US$585 billion.
This is how China and Russia have financed the U.S. military budget in recent years, by purchasing bonds and bills that allow the U.S. Treasury to finance this deficit without raising interest rates. The U.S. military budget is aimed at controlling China and Russia and the Eurasian bloc, and destroying their economies, while those countries need to hold dollar reserves against possible future U.S. currency wars.
Towards the internationalization of the yuan and the ruble
China, Russia, allied countries of Eurasia, the rest of the BRICS countries, countries of the Shanghai Cooperation Organization, SCO, and possible members such as Iran and Turkey, are preparing to reduce their vulnerability to a bankrupt world banking system. If they resort to bilateral currency agreements for their trade, bypassing the U.S. dollar, it will lose its reserve currency status and be replaced by other currencies, most probably the Chinese Yuan.
In 2014, China and Russia reached an agreement to exchange rubles and yuan for three years of up to an equivalent of 25 billion dollars. In May 2017, Russia and China established an investment fund worth 68 billion yuan (US$10 billion) and also plan to extend the bilateral currency exchange agreement for another three years. Trade between the two countries increased by a third in the first eight months of this year.
A New Era for Socialist China
In 2016, China joined the International Monetary Fund as one of the five main currencies in the currency basket by which the IMF calculates the value of its Special Drawing Rights. That step gave the yuan a big boost in international acceptance. Before 2004 it was not permitted as an instrument of international trade outside of China, but since then its monetary authorities have laid a careful foundation for the internationalization of the yuan, which already exceeds expectations, to become a global anchor, a reserve currency that will overtake the Euro in the next few years.
In a 2016 report, the HSBC bank reported that since 2012, the Yuan (or renminbi, RMB) has become the fifth most used currency in the world. Elvira Nabiullina, governor of the Central Bank of Russia said: "We have finished working on our own payments system, and if something happens, all operations in SWIFT format (World Society for Interbank Financial Telecommunication) will also work within our system. We have created an alternative,” something which alarms the U.S. Treasury, the Federal Reserve and Wall Street banks.”
"The world financial system needs more balance," said Russian Prime Minister Dmitry Medvedev yesterday in a meeting with Chinese Premier Li Keqiang. "We are discussing the use of our own national payments systems, including China's UnionPay, and we are also developing our own Mir system." He revealed that the two countries will issue a joint payment system in the future.
Venezuela as a platform for the petroyuan
In 1974 the U.S. government worked out how to control the international oil trade by convincing the Saudi Arabian authorities that their petrodollars would be most secure in U.S. banks. But recently the U.S. hydraulic fracking industry has crushed oil prices, creating a fiscal problem for Saudi Arabia.
In order to avoid a steep fall in oil revenue, Suadi Arabia’s King Salman visited Moscow in early October where no doubt the plan for a petroyuan was discussed
China has been pushing for more use of the yuan in oil settlements. As the country has become the largest importer of oil, surpassing the U.S., it can call the shots internationally and provide greater energy security. So Beijing hopes to challenge the dollar by establishing a futures market with its own currency and reports indicate that China is willing to introduce a benchmark index of oil with a price in yuan in the coming months.
An oil futures market based on the yuan will stimulate demand for its currency that will give China strategic influence. The plan is to launch an oil futures contract on the Shanghai International Energy Exchange, INE, but convincing large oil producers and consumers to use the yuan and invest in the Shanghai benchmark faces obstacles.
Without the participation of some oil producing countries, such as Saudi Arabia, Russia, Iran, Indonesia or Venezuela, it will be difficult to create a market that makes a difference.
Due to sanctions and global intimidation by the U.S. Treasury Department, Iran, in particular, was one of the first to adopt yuan-based oil sales. Now in 2017, Venezuela is following suit. For the same reason, Russia agreed to trade some oil based on the yuan in 2015. Any decline in the status of the dollar severely weakens Washington's ability to wage its economic war against Russia and destabilize the Eurasian bloc.
China and Russia do not seek to attack the dollar to destroy it, but to create an independent alternative reserve currency for other nations that want to protect themselves from increasingly frequent financial attacks by U.S. Treasury banks, Wall Street and hedge funds. For Venezuela it is about building a crucial element of national sovereignty because today’s dollar system is being used to devastate its economic sovereignty through sanctions that affect its social programs and investments, as well as its trade with the rest of the world.
Now, China and Russia’s system of settling bilateral payments is being extended to other Belt and Road Initiative countries in Eurasia, to the BRICS countries and to Venezuela as part of its geopolitical orbit, the Chinese government’s declaration contributes towards creating this alternative monetary system. Moreover, as an alternative backed by gold, independent of the politically explosive and speculative U.S. dollar system, in years to come it could protect China’s allies from economic attacks and financial war by Washington the European Union.