Global Monetary Power Shifts from Dollar, China Stakes Claim, Rescues Currencies of Argentina and Russia

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Another strategic step to dislodge the dollar from its dominance

By Bianca Fernet, The Bubble:

China appears to be taking the task of acceding to hegemonic, or at least semi-hegemonic, economic status quite seriously.

In July 2014, Argentina reached an agreement with China to request up to $11 billion in Chinese yuan, swapped for Argentine pesos, over a three-year period. The first tranche of the equivalent of $814 million was received by Argentina’s Central Bank on 30 October 2014. The second tranche of the equivalent of $500 million hit the bank on 17 November 2014. Each swap must be swapped back within a 12 month period.

This swap helped Argentina out because it eased the pressure on the peso by making it worth relatively more in foreign currency terms. Come again?

While all eyes are on the ARS/USD exchange rate, in reality that rate is only representative of the ARS/REST OF WORLD exchange rate. By swapping yuan with China, Argentina has more yuan and fewer pesos, and can exchange the yuan for dollars or euros on international markets, thus increasing the value of the peso vis-à-vis the rest of the currencies in the world, including the US dollar.

Now two Chinese ministers, Foreign Minister Wang Yi and Commerce Minister Gao Hucheng, have offered the same support to Russia, whose ruble is having a pretty lousy year due to plummeting oil prices and biting sanctions.

While Chinese support doesn’t fix the main problems in either country, namely capital outflow unmatched by inward investment, poor access to global markets due to sanctions (Russia) or the default (Argentina), and now plunging oil prices, the intervention caused both the peso and the ruble to rebound.

In both cases, China has elected to exchange its relatively valuable currency for one that is remarkably unstable and likely to lose value. For each tranche swapped, it will have to hold the pesos or rubles for up to one year before swapping it back for yuan. And China is taking the risk that in one year possibly Argentina or Russia might not have the purchasing power to buy yuan on world markets in the event of a currency crisis. So why would China take these risks in countries where other lenders or investors have shied away?

Resources. And consumer bases.

By swapping yuan for rubles or pesos, China is putting yuan in the hands of two countries with significant consumer bases. And what are yuan used for besides propping up flailing currencies? Buying Chinese stuff!

Argentina and Russia are both resource exporters. Argentina’s economy pretty much hinges on exporting agricultural products, and also possesses oil and gas, precious and base metals, and bulk commodities. Russia’s economy is oil and gas. China can use the swapped pesos and rubles to buy these valuable and needed commodities from its trading partners.

At the end of the 12 month tenor of each swapped tranche, Argentina and Russia will have to return the yuan and receive pesos and rubles respectively in return. And this will bring back the same dilemma the countries face today – how to access valuable hard foreign currency. Assuming that the peso and ruble are currently not victims of short term speculative attacks but rather that the rapid depreciation is symptomatic of unsustainable policies and practices, this swap is doing nothing more than buying time.

At the end of the swap, Argentina and Russia will be paying for borrowed time with their nations’ resources.

China is taking yet another a strategic step to embed the yuan more firmly in international trade and in doing so dislodge the US dollar from its dominant position as the global transaction and reserve currency.

So what should we do? Freak out and panic and buy gold while learning Chinese and digging a bomb shelter to hide the gold in? No.

Money is, at the end of the day, somewhere between a tool and a philosophical idea. At one end of the spectrum it allows goods and services to change hands, and at the other it dominates and destroys lives.

So just take note, and be aware that the tides of global monetary power are shifting and China is staking its claim. But we’ll all probably be ok. Apocalypse later. Possibly open an account somewhere you can hold some yuan if you’re concerned. And order Chinese takeaway for dinner. By Bianca Fernet, The Bubble

So what are the real consequences of Argentina’s ingenious policies? Warning: humor lurking in between all the seriousness. Read…  Bloody Hell: Argentina’s Import Controls Cause Tampon Shortage

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  7 comments for “Global Monetary Power Shifts from Dollar, China Stakes Claim, Rescues Currencies of Argentina and Russia

  1. Michael Gorback
    December 24, 2014 at 12:40 pm

    Go for it. I’d love to see how a mercantile economy tries to issue a reserve currency. Pass the popcorn.

    • CrazyCooter
      December 24, 2014 at 2:32 pm

      Hah! Most folks don’t realize that conundrum even exists. I think Charles Hugh Smith did a post on it a while back.

      That said, we got quite the mess on our hands … does anyone know how this mess will ultimately play out?

      Stay nimble!



    • December 24, 2014 at 5:36 pm

      Mike, so here is some interesting data:

      World reserve currency holdings:
      USD: 62% (down from 72% in 2000)
      EUR: 25% (up from 18% in 2000, was accelerating until 2009 when it reached 29%, but since debt crisis it has been dropping)
      UKP <5%
      JPY <5%

      The Eurozone has had a trade surplus with the rest of the world most of the time of its existence, and still does so now. And yet, the euro is the 2nd most important reserve currency.

      So the link between trade deficits/surpluses and reserve currency status is very shaky. This is a complex world, and theoretical relationships don't often pan out in reality.

      As trade currency, the euro is already very close to the dollar, and in some months exceeds the dollar. This is what I wrote about it in February:

      "The dollar and the euro have been duking it out over the top spot. In February, the dollar accounted for 38.9% and the euro for 33.0% of all payments traffic. January last year, for example, the euro was in first place with a share of 40.2%, while the dollar only came up with 33.5%."

      The article also has some data on China (minuscule share still, but growing rapidly)

  2. Peter Engelhardt
    December 24, 2014 at 2:39 pm


    China is acting like a pawn broker – it takes in collateral in the form of third world currency (say Pesos) and hands out Yuan. I go to Argentina every year. In Feb 2014, you got 10 Pesos on the black market for one “Dolár Blue”. I am returning in Feb 2015 – based on today’s parallel exchange rate, I will get 12 Pesos for 1 US Dollar. In 2015, the Chinese will buy agricultural commodities from Argentina and use the Pesos in their account to make payment. The Chinese may “lose” value. But then again, China can print as many Yuan as it sees fit. The use of the US Dollar as the direct medium of exchange is circumvented. China needs most everything and can act as a medium of exchange. Transactions like this will multiply with other nations that have stuff to sell but no local currency with international exchange value.


  3. Jay
    December 25, 2014 at 8:29 am

    Kissinger has been doing something over there in China for many years, but I’m not sure exactly what or how it all plays into the final global takeover plan.

  4. Sue
    December 25, 2014 at 10:33 pm

    Nah, I’m buying gold while learning Chinese and digging a bomb shelter to hide the gold in. Much better choice. Also, two words: Flame throwers.

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