Is China Days Away From Killing The Petrodollar?

Authored by Nick Giambruno via InternationalMan.com,

Not long ago, there was a popular joke in China that went something like, “Who is Xi Jinping?”

The answer was, “The husband of Peng Liyuan,” the famous singer Xi is married to.

Today, Xi is China’s president. He leads 1.4 billion people. And he’ll likely be the most powerful person in the world soon.

As I mentioned last Wednesday, Trump’s new steel and aluminum tariffs are part of a larger, escalating battle between the US and China.

China is rapidly displacing the US as the dominant global power. This shift is inevitable. China’s economy will be twice as large as the US economy by 2030.

This leaves the US with limited options…

  1. It could kick back and let China displace it as the most powerful country in the world.

  2. It could start a military war with China.

  3. And it could push the current trade battle into an all-out economic war against China.

I think a full-blown economic war is the most likely. Under President Trump, it’s all but certain.

That said, the Trump administration seems to underestimate China’s position—in both the short and long term.

For decades, the US has been able to exclude virtually any country it wants from international trade. Right now, if one country wants to trade with another, it basically needs US permission first.

That’s because (for a short while longer) the US dollar is the world’s most important currency. The US Navy also dominates the world’s oceans, controlling most major shipping lanes.

But China is building a new international system. Eventually, it will let China and its trading partners totally bypass the US.

And, as I’ll explain shortly, a key piece is set to fall into place on March 26…

History’s Biggest Infrastructure Project

The New Silk Road is the centerpiece of China’s new plan.

In the coming months and years, it will include high-speed rail lines, modern highways, fiber optic cables, energy pipelines, seaports, and airports. It will link the Atlantic shores of Europe to the Pacific shores of Asia.

China expects to have its New Silk Road fully up and running by 2025.

This is history’s biggest infrastructure project. The whole point is to completely re-draw the world economic map. If it’s successful—and it most likely will be—China will dominate Eurasia.

President Xi announced the $1.4 trillion plan in late 2013. When it’s done, a train leaving Beijing will be able to reach London in only two days.

Keep in mind, the Chinese are careful long-term planners. When they make a strategic decision of this magnitude, they totally commit.

Take their road system, for example. Between 1996 and 2016 China built 2.6 million miles of road, including 70,000 miles of highway. In just 20 years, it built far more highway than the US has in its entire existence.

In other words, the Chinese get things done. They have the political might—along with the financial, technological, and physical resources—to make the New Silk Road happen. With iron-willed President Xi at the helm, I have no doubt they’ll pull it off.

Not long from now, the New Silk Road will help China unseat the US as the world’s dominant global power and totally upend the geopolitical paradigm.

But before that happens—within the next couple of weeks, actually—China is introducing a way for anyone who buys or sells oil to opt out of the US-dominated global monetary system.

Why the Dollar Is Different Than the Peso

Most investors know that oil is the largest and most strategic commodity market in the world. As you can see in the chart below, it dwarfs all other major commodity markets combined.

Every country needs oil. And, for a short while longer, they need US dollars to buy it. That’s a very compelling reason to hold large dollar reserves.

This is the essence of the petrodollar system, which has underpinned the US dollar’s role as the world’s reserve currency since the early 1970s.

Right now, if Italy wants to buy oil from Kuwait, it has to purchase US dollars on the foreign exchange market to pay for the oil first.

This creates a huge artificial market for US dollars.

In part, this is what separates the US dollar from a purely local currency, like the Mexican peso.

The dollar is just a middleman. But it’s used in countless transactions amounting to trillions of dollars that have nothing to do with US products or services.

Since the oil market is so enormous, it acts as a benchmark for international trade. If foreign countries are already using dollars for oil, it’s just easier to use dollars for other international trade, too.

In addition to nearly all oil sales, the US dollar is used for about 80% of all international transactions.

This gives the US unmatched geopolitical leverage. The US can sanction or exclude virtually any country from the US dollar-based financial system at the flip of a switch. By extension, it can also cut off any country from the vast majority of international trade.

The petrodollar system is why people and businesses everywhere in the world take US dollars. Other countries have had little choice about it, until now…

China’s “Golden Alternative”

China does not want to depend on its main adversary like this. It’s the world’s largest oil importer. And it doesn’t want to buy all that oil with US dollars.

That’s why China is introducing a new way to buy oil. For the first time, it will allow for the large-scale exchange of oil for gold.

I’m calling this new mechanism China’s “Golden Alternative” to the petrodollar. It goes live on March 26.

Ultimately, I think people will look back and see the Golden Alternative as the catalyst that killed the petrodollar.

Here’s how it will work...

The Shanghai International Energy Exchange is introducing a crude oil futures contract denominated in Chinese yuan. It will allow oil producers to sell their oil for yuan.

China knows most oil producers don’t want a large reserve of yuan. So producers will be able to efficiently convert it into physical gold through gold exchanges in Shanghai and Hong Kong.

As of March 26, countries around the world will have a genuine, viable way to opt out of the petrodollar system. Now is the time to position yourself to profit.

Gold Will Soar

With China’s Golden Alternative, a lot of oil money will flow into yuan and gold instead of dollars and Treasuries.

I think the price of gold is going to soar.

China imports an average of around 8.5 million barrels of oil per day. This figure is expected to grow at least 10% per year.

Right now, oil is hovering around $60 per barrel. That means China is spending around $510 million per day to import oil.

Gold is currently priced around $1,300 an ounce. That means every day China is importing oil worth over 390,000 ounces of gold.

If we assume that just half of Chinese oil imports will be purchased in gold soon, it translates into increased demand of well over 60 million ounces per year—or more than 55% of gold’s annual production.

Of course, China won’t be the only country using the Golden Alternative. Anyone will be able to.

The increased demand for gold is going to shock the market. That’s why I think the price of gold will soar.

As the petrodollar dies, gold will be remonetized... and China will be another step closer to displacing the US.

*  *  *

Editor’s Note: Owning physical gold’s not the only way to turn the coming chaos into huge profits. There are other practical steps you can take before the US-China conflict reaches its boiling point. Get the details in our guide to Surviving and Thriving During an Economic Collapse.

Comments

Twatter Wed, 03/21/2018 - 22:06 Permalink

China paints tits on back bends over forwards backwards, its ok Yankee, Ha Ha!

Joe six pack only gets motivated when His team wins the super bowl.

Luc X. Ifer IH8OBAMA Wed, 03/21/2018 - 22:22 Permalink

The price to being stupid is extinction, that's just the basic law of natural world.

US as socio-economic enclave owned by a small but totalitarian powerful aristocracy - neo feudalism, decided to export it's enclave means for prosperity and power to other social enclaves known for centuries as adversaries and so it weakened itself and nurtured the growth of the traditional enemies.

That's how greed is collapsing societies - just science.

https://www.ted.com/talks/jared_diamond_on_why_societies_collapse

The Chinese managed to survive as enormous social enclave for thousands of years and the reason is very simple, in every epoch their leaders adopted the proper survival and prosperity strategy for the time, that's the power of applied wisdom - planing long term for the social enclave prosperity ensures a surviving, strong enclave. This is why now China also cracks on corruption and consolidates power, because they know that corruption is cancer for the social's enclave well being and to face near future massive military engagements they need a rock solid social structure.

America can be saved only in one way, by returning it's means of prosperity back to its enclave citizens. People of America should arrest and put on trial the ones reaponsible for collapsing their and their children's enclave for treason and socio-economic terrorism.

In reply to by IH8OBAMA

ZeroSpam Pearson365 Thu, 03/22/2018 - 02:42 Permalink

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This Whackjob with Multiple Log-on's (aka "stizazz" and "lloll" "beepbop"  "Braveforce"  "PRIVETHEDGE"  "SLOPZ38"  "Schlomo Scheklestein"  "Jumanji"-- hopefully banned) is a CHRONIC SPAMMER whose "disguised links" ("Graphic Images", above) will take you to his Spam- and Trojan-laden webpage, fondly known by ZHers as "The Whacked Out Biblicism SPAM page" where you will be the happy recipient of numerous virus from this very disturbed and obsessed individual, spamming here for more than five years.

•dailywesterner
•celebrity-leaks (porn)
•biblicism
•"I made $7000 last week ..... this is what I do"

END SPAM!

Copy and send this text to abuse@zerohedge.com

Please remove all postings and ban log-on from user "PIER" who chronically SPAM posts short-URL links to his virus- and trojan-filled website. This is the same individual posting chronically as  "STIZAZZ" "PRIVETHEDGE" and "LLOLL" "SLOPZ38"  "BRAVEFORCE"  "BEEPBOP"  "SCHLOMO SCHEKLESTEIN"  "JUMANJI", among dozens of other banned log-ons [that's YOU "dailywesterner" and "biblicisminstitute" and "celebrity-leaks" (porn) and "I made $7000 last week...."]. Thank you.

In reply to by Pearson365

38BWD22 Luc X. Ifer Wed, 03/21/2018 - 23:12 Permalink

 

Not meaning to break up a nice dialog there, but the author (Nick Giambruno) misses an important point.

If China wants to have their Yuan be a/the reserve currency, they HAVE TO RUN TRADE DEFICITS.  "Triffin's Dilemma"

https://en.wikipedia.org/wiki/Triffin_dilemma

There have to be Chinese Yuan "out there" floating around if importers and exporters are going to use it!  And they get them out there by exporting them (for goods).  NO ONE will use hard-to-get Yuan if they can't get them.

In reply to by Luc X. Ifer

COSMOS 38BWD22 Thu, 03/22/2018 - 01:20 Permalink

Hmm yes trade deficits are one way but the Chinese have also been loaning out billions of yuans all over the world.  You dont have to just run deficits.  There are many ways to soak a currency into the world system for the biggest economy in the world aka CHINA.  This is just one of a death by a thousand cuts for the dollar aka lingchi. Note pretty gruesome pics in link, looks bad for the dollar and all those granite kitchen countertops in open concept kitchens throughout the USA

http://www.cvltnation.com/one-thousand-cuts-terrifying-ancient-chinese-…

In reply to by 38BWD22

slopz38 COSMOS Thu, 03/22/2018 - 01:41 Permalink

I j­­­u­­­s­­­t g­­­o­­­t p­­­a­­­i­­­d $­­­6­­­7­­­8­­­4 w­­­o­­­r­­­k­­­i­­­n­­­g o­­­f­­­f m­­­y l­­­a­­­p­­­t­­­o­­­p t­­­h­­­i­­­s m­­­o­­­n­­­t­­­h. A­­­n­­­d i­­­f y­­­o­­­u t­­­h­­­i­­­n­­­k t­­­h­­­a­­­t­­­'­­­s c­­­o­­­o­­­l, ­­­m­­­y d­­­i­­­v­­­o­­­r­­­c­­­e­­­d f­­­r­­­i­­­e­­­n­­­d h­­­a­­­s t­­­w­­­i­­­n t­­­o­­­d­­­d­­­le­­­r­­­s a­­­n­­­d m­­­a­­­d­­­e o­­­v­­­e­­­r $­­­9­­­k h­­­e­­­r f­­­i­­­r­­­s­­­t m­­­o­­­n­­­t­­­h. I­­­t f­­­e­­­e­­­l­­­s s­­­o g­­­o­­­o­­­d­­­ m­­­a­­­k­­­i­­­n­­­g s­­­o m­­­u­­­c­­­h m­­­o­­­n­­­e­­­y w­­­h­­­e­­­n o­­­t­­­h­­­e­­­r p­­­e­­­o­­­ple h­­­a­­­v­­­e t­­­o w­­­o­­­r­­­k f­­­o­­­r s­­­o m­­­u­­­c­­­h l­­­e­­­s­­­s. T­­­h­­­i­­­s i­­­s w­­­h­­­a­­­t I­­­ d­­­o­­­,:  
°°°°°°°°°°http://ow.ly/V6Fs30gda11

In reply to by COSMOS

OpenThePodBayDoorHAL 38BWD22 Thu, 03/22/2018 - 01:31 Permalink

Yep. But it's worse than that.

Last ones off the gold standard got screwed. First ones back on it will get screwed.

With this system, all the fiat issuers (USD etc) can liquidize free money and get gold for it. China is on the other side of the transaction: they must offer gold in return for fake money.

No-so-smartee!

In reply to by 38BWD22

Watson 38BWD22 Thu, 03/22/2018 - 06:23 Permalink

===
they HAVE TO RUN TRADE DEFICITS. "Triffin's Dilemma"
===

I'm sure the economists behind this idea mean well, but didn't the UK
run surpluses over the period 1800 - 1900 when the GBP was the world reserve currency?
When the UK occupied much the same world role as the US does today.

I think that, if anything, a reserve currency should be of a country with a big economy that runs surpluses.

Which is why I think that the Yuan will be the worlds next reserve currency, and quite soon too.
All it needs is the Chinese to decide to allow the currency to freely float, and also to open
up an international market in Yuan denominated Chinese government bonds.

OT but an interesting thought:
Maybe the Chinese issue dollar-denominated government bonds?
Interesting to see the credit spread...you see I think the US will not be able to dial down
the combination of entitlement and defence spending that produces deficits, the US debt pile
gets too big, and the US tries to buy time by ('temporarily' of course) not paying coupons
or maturities to overseas holders.

Watson

In reply to by 38BWD22

pc_babe Luc X. Ifer Thu, 03/22/2018 - 06:41 Permalink

Why is everyone acting like this is some big-time super special Sun Tzu move? Its just another Chinese Copy/Paste mouse click.

At one time the US dollar was convertible to Gold, until the French said ... give us our gold -- then it wasn't.

Dont forget ... China invented paper in 100BC. They'll crank up the printing press faster than a 3-legged rickshaw on the downslop to the Bund.

Some cuck will call their bluff and poof ... emperor Xi wear no cloths

In reply to by Luc X. Ifer

BigCumulusClouds IH8OBAMA Wed, 03/21/2018 - 22:28 Permalink

The author missed the most important point with respect to the dollar as a reserve currency: all transactions with it are a tax on the purchaser. Dollar inflation is nothing but a tax paid to the US government and to the member banks of the Federal Reserve system. It is also a tax paid to Visa and MasterCard since they too get to introduce new money into the system. Therefore all purchases using dollars, because they involve an incremental inflationary tax on the purchaser, result in a tax paid to the US entities responsible for printing more money. 

 

This international wealth transfer is lost lost once the reserve currency is lost. 

In reply to by IH8OBAMA