How Chinese Yuan will overtake the US dollar

Julian D W Phillips
Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said over the holiday weekend.

China is Japan's biggest trading partner with $340 billion in two-way transactions last year. The pacts between the world's second- and third-largest economies mirror attempts by fund managers to diversify as global, financial markets remain volatile and decaying. It marks a major leap forward of the internationalization of the Chinese currency, a step that has been developing for the last few years, from tiny beginnings.

It signals that the Chinese banking system has developed to the stage where they can handle international transactions of note. The development of the banking system is clearly far advanced, so expect the enlargement of the international Yuan market to pause, as this leap in size settles in and any teething problems eliminated.

The financial world may belittle the present moves as still very small in money terms in a global context, but structurally the move should make the developed financial world jump to attention.

Of considerably more importance is the impact on global foreign exchanges and the role of the U.S. dollar as the world's sole global reserve currency. For more than two years now Gold, Silver Forecaster have been predicting that the day would come when Chinese exporters/importers would offer and bid prices for goods in the Chinese Yuan. Well it has arrived, albeit confined to Asian trade at the moment.

As of now, $350 billion in global trade will disappear, replaced by Yuan/Yen trade. Where will these dollars go? Over time they will be sold off and head home through a falling exchange rate. That's why we'll see the Yuan appreciate, but only initially, as the Chinese ensure that demand is met by foreign sales of Yuan for non-U.S. currencies.

As time passes the process of the internationalization of the Yuan will primarily be at the expense of the dollar. At some point in this process, the rise of the Yuan and the fall of the dollar from its throne will become visible on foreign exchanges and in the financial picture inside the U.S.A. and Europe. At best, we'll see the Yuan join the world's current leading currencies in global trade, but rising in the future to potentially the prime global, reserve currency at worst.