Two years ago, the CME announced USD/CNH futures [8] trading enabling speculation (and hedging or risk transfer) of offshore Chinese Renminbi [9]. On the other side of the world this week, a couple of gentlemen that few people have ever heard of signed an agreement that has massive consequences for the global financial system. It was a Memorandum of Understanding signed by representatives of the Singapore Exchange and Hong Kong Exchange. Their aim – to combine their forces in rolling out more financial products denominated in Chinese renminbi. This is huge...
Submitted by Simon Black via Sovereign Man blog [10],
Hong Kong and Singapore are THE two dominant financial centers in Asia. For years they’ve been locked in competition with one another, much like New York and London. So their public partnership is a very big deal… indicative of the clear objective they have in front of them.
Bottom line – finance executives in Asia see the writing on the wall. They can see that the dollar is in a period of terminal decline, and it’s clear that the Chinese renminbi is going to take tremendous market share away from the dollar. They want a big piece of the action.
The renminbi has already surpassed the euro to become the #2 most-used currency in the world when it comes to trade settlement, according to a report released yesterday by the Society of Worldwide Interbank Financial Telecommunication (SWIFT).
Right now the renminbi has about an 8.6% share of the global market for trade settlement. Granted, the dollar has the lion’s share of trade settlement at more than 80%.
But just look at how quickly the renminbi has grown; in January 2012, its share of the global market was just 1.9%. So it’s grown by nearly a factor of 5x in less than two years.
With today’s agreement between Hong Kong’s and Singapore’s financial exchanges, that growth will likely accelerate.
As we’ve discussed before, the dollar is in a unique position simply because it is the world’s dominant reserve currency.
This means that when a rice distributor in Vietnam does business with a Brazilian merchant, they’ll close the deal by trading US dollars with each other… even though neither nation actually uses the dollar.
It’s been this way since World War II, simply because there has been such a long tradition of trust in the United States, and a steady supply of dollars throughout the world.
But this confidence is fading rapidly as merchants and banks around the world have been seeking alternatives, primarily the Chinese renminbi.
As the dollar’s market share in international trade decreases, it will mean the end of US financial privilege. No longer will the US be able to print money without repercussions.
And as so many other nations have learned the hard way, when you print money with wanton abandon and indebt your nation to the hilt, there are severe consequences to pay.
Last week’s move between Hong Kong and Singapore gives us a glimpse into this future.
We’ll soon see more financial products– oil, gold, Fortune 500 corporate bonds, etc. denominated in renminbi and traded in Asia.
And as trade in these renminbi products grows, the dollar will be closer and closer to its reckoning day.
Years from now when this has played out, it’s going to seem so obvious.
Just like the post-Lehman crash in 2008, people will scratch their heads and wonder– ‘why didn’t I see that coming? Why didn’t I recognize that it was a bad idea to loan millions of dollars to unemployed / dead people?’
Duh. Same thing. People will look back in the future and wonder why they didn’t see the dollar collapse coming… why they didn’t recognize that it was a bad idea for the greatest debtor nation in the history of the world to simultaneously control the global reserve currency…
The warning signs are all in front of us. And last week’s agreement between Hong Kong and Singapore is one of the strongest signs yet.