Is the “Petro-Yuan” a Credible Challenge to Dollar Supremacy?

Wolf Richter with Jim Goddard on This Week in Money:

China latest effort to get its currency to be used globally is the “petro-yuan.” Is it a credible challenge to the supremacy of the US dollar? If China dumped US Treasuries, what would that accomplish? And more…

Central banks around the world seem leery about the Chinese yuan. Read…  What Could Dethrone the Dollar as Top Reserve Currency?

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  44 comments for “Is the “Petro-Yuan” a Credible Challenge to Dollar Supremacy?

  1. bev kennedy
    Apr 15, 2018 at 1:47 pm

    Interesting. People always assume the status quo is the status quo forever. As we move away in time from Bretton woods. Also silver at one point was just as valuable a gold not deemed poor man’s gold.

    • Jonathan Vause
      Apr 15, 2018 at 1:52 pm

      whatever follows the dollar as the global reserve currency, it won’t be RMB

      https://deep-throat-ipo.blogspot.co.uk/2018/04/the-new-phone-books-herethe-new-phone.html?m=1

      and go down a bit

    • Corey
      Apr 15, 2018 at 1:52 pm

      Is the new status quo, a renters nation, the trend seems that way. Living in MA, RE remains well above the average, challenging the reserve only seems to imply less ability to purchase property..

    • Frederick
      Apr 15, 2018 at 2:51 pm

      Silver was at one point just as valuable as gold I don’t think so but Historically it’s ratio has been around 10 to 1 Gold to Silver

      • John
        Apr 15, 2018 at 8:37 pm

        The ratio that I have always read was 15:1, the ratio of silver that was mined as a byproduct of gold production. Curious as to where you heard the 10:1 ratio.

      • bkennedy
        Apr 16, 2018 at 6:56 pm

        Go back historically and you will find silver was indeed as valuable.

      • bkennedy
        Apr 16, 2018 at 9:06 pm

        Go back in time for example when it was introduced in Egypt. And I believe around 1600s in England. Anyway no matter

    • illumined
      Apr 15, 2018 at 7:42 pm

      True people assume the status quo is the status quo forever, but looking at prior predictions of other nations’ ascendance that precedent works against China more than helps it. Remember when the Japanese Yen was supposed to be the world reserve currency of the turn of the 20th century? And how that didn’t happen? It’s easy to draw a straight line and assume that’s when country X is going to overtake us, but the short term often hides a variety of structural issues. That’s why such predictions in the 60’s of the Soviet Union and in the 80’s of Japan didn’t pan out.

      https://www.nytimes.com/1986/08/31/business/the-yen-rapidly-come-of-age.html
      https://www.chinausfocus.com/finance-economy/yens-history-a-cautionary-tale-for-the-yuans-future

      China today is a hot mess, they have a massive credit bubble that dwarfs Japan’s in relation to the size of their economy, they don’t have a financial system that’s capable of supporting reserve currency status, and with their recent defacto nationalization of their entire tech industry I don’t see any of their problems getting better.

      • d
        Apr 16, 2018 at 5:31 am

        china also another MAJOR issue.

        Remembering this china started in 1950 as a closed system an did not open until 1973, and has never been a true market economy.

        It has also never experienced a true internal depression event.

        How can a state command controlled Economy that has never proved it can successfully control and survive an internal depression event, even dream dream of holding global reserve status.

        More Importantly. How can the rest of the majors in the Global economy, even dream of awarding that status to it.

        CNY/RMB as the Global reserve currency.

        Come back in another 100 years if you are still a major and maybe we can talk about it then, you Beijing CCP dreamers.

    • Nick Kelly
      Apr 16, 2018 at 12:10 pm

      Not quite. It was always much cheaper than gold but being much more plentiful it was a better medium of exchange.

      When I say much cheaper not as cheap as today compared to gold.
      The Latin Union formed in the 1800’s was a kind of early ECB and was mainly concerned with fixing a price between gold and silver.
      It settled on 1: 16 which of course made silver much more valuable than today.
      One reason for its eventual demise: the ease of ‘counterfeiting’ by governments by alloying silver with cheaper metals. Both Greece and the Papal States got caught doing this.

      In the early years of the Depression it was the collapse of the value of silver that caused the collapse of the finances of poorer countries with silver currencies, e.g. China.

      • Nick Kelly
        Apr 16, 2018 at 12:24 pm

        Trivia PS: at the low point of the modern silver price the Bank of Canada would not honor its own five dollar, one ounce Maple Leaf coin. It wouldn’t give the bearer a five dollar bill for it.

        To me this seems almost illegal but I guess they can do it.

        Later the mint also got into a tiff with the Canadian banks.
        The latter had ordered their usual millions of one dollar coins or loonies (there are no one dollar bills in circulation) but then the toonie (2 $ coin) was introduced, resulting in much lower demand for loonies.
        The mint wouldn’t take back the excess loonies.
        One consequence: the Canadian banks no longer display sets of coins offered by the Mint. At one time these sat on bank counters.

  2. Frederick
    Apr 15, 2018 at 2:49 pm

    Pretty funny Pot stocks Indeed You Can’t make this stuff up folks

  3. cdr
    Apr 15, 2018 at 2:53 pm

    “Is the “Petro-Yuan” a Credible Challenge to Dollar Supremacy? ”

    Didn’t listen to the recording. But, to answer the question …. “ha, ha, ha, ha … no”. That about covers it.

    • Frederick
      Apr 15, 2018 at 4:32 pm

      Funny thing is I’m getting my SS checks in dollars and I’m NOT in the laughing mood lately Maybe I won’t live long enough to see the dollar go the way of all the others

      • cdr
        Apr 16, 2018 at 9:34 am

        You would rather get your SS checks denominated in yuan, yen, or euros? Give me a break.

        This is one of those questions that separate those who have a grasp of elementary economics with those who have an abundance of uniformed opinions about economics.

    • TJ Martin
      Apr 16, 2018 at 12:52 pm

      Think that’s funny ? Trying wrapping your head around this . 1.17 Trillion dollars . Thats how much China owns in US bonds . Then give this a try . Double that amount minimum . Thats how much US debt China owns . Still laughing ? Double that amount again . Thats how much US commercial and residential real estate China owns or controls . And thats not taking into consideration how many US corporations and manufactures China ether owns outright . controls .. or for all practical purposes controls

      So is China a ‘ credible ‘ challenge to the US dollar ? Damn right it is .

      • d
        Apr 17, 2018 at 4:00 am

        You see this situation you outline as an advantage to china in this growing conflict with primarily the US but including all chinas hard currency trade recipients.

        I see it as a Nightmare for china, if they liquidate, what to buy with all those dollars.

        What if the US freezes the lot, which it will do in a serious conflict.

        You owe the bank 10 K you dont pay, you have a problem,

        You owe the bank 10 T you dont pay, the bank has a BIG problem.

        china is the bank here.

        chinas aggression and restrictive trade practices, are generating huge global problems, just as they did last time, which lead to the opium period, and the opium wars.

        Unless china seriously changes its ways. We will need to find a name, for the wars that will come, as a result of the current chinese aggressive and restrictive trade practices.

        Involving all the same Major player’s we have a situation in the ME eerily similar to the period prior to 1914 in Europe.

        Involving all the same Major players (the US was a player in teh opium period) in the east we have a global situation eerily similar to what lead to the Opium period. The only major difference is that currently the administration of chian is a little stronger.

        Theose who do not study THE TRUE History are bound to repeat it.

        the children of Mao, who now run china, were raised on Historical fables. Particularly regarding the opium period, and what lead to it.

        Unless chian changes its ways. There will be no winners in this, just big and bigger loosers, surrounded by a huge mess.

        • bkennedy
          Apr 17, 2018 at 6:11 pm

          My. Thoughts are that China is rapidly moving through the stages of industrialization and shortly will emerge with its own internal consumer economy enough to be a market for most of its output that it has been selling to the west
          The. West went through similar but it took a couple of centuries.

        • d
          Apr 20, 2018 at 6:11 am

          “My. Thoughts are that China is rapidly moving through the stages of industrialization”

          It is, way too fast aided by Stolen/Extorted Technology. It still has to weather its first “Internally” “serious correction event”

          “and shortly will emerge with its own internal consumer economy enough to be a market for most of its output that it has been selling to the west”

          Not a chance.

          china has inequality that makes the US look angelic.

          A large part of the population, is still rural village subsistence agriculture.

          The state claims their average income is x and they have lifted millions from poverty since 1950.

          Lifted to a level the state claims, is not poverty.

          They get that average income, due to the huge incomes, of the ccp mafia state oligarch family’s, contribution to the national “Average”.

          china still has a larger rural, than permanent urban population.

          It would take a book to fully dissect why the myth of a chinese consumer based economy by 2035 is just that, but it is.

          Part of the permanent urban population is moving to a higher level of consumerism, but not the whole urban population, let alone the national population.

          That still dosent resole the issue, with the ccp pushing “buy made in china” from every street corner, what is china going to do, with all those dollars, buy gold? At the current grossly inflated prices, then sit there and look at it???

          increase the size of it commodity hoards, that it was using to produce exports?

          Hoard oil??

          American workers a going to get slapped around in this stupid trade spat, china has already lost.

          The opinion and attitude in the, Eu, England, and the US, and a lot of other places, is now ANTI china. Or at least on average, no longer positive to china. People are getting tired of cheap chinese products, that dont last. There is even a negative millennial term for that. People will buy cheap chinese products, not expensive ones, so china will now have issues moving up the value chain.

          TPP

          The original motivation for the start of TPP. Was a free trade deal with china, that china broke every clause in, that did not advantage it.

          Many third world and smaller nations can not be told. They will have to learn like Ecuador, that china is a predatory lender, and a win win trade deal with china, is 2 wins for china. Just like we did.

          china has leveraged itself to the top by cheating and stealing, now it must discover just like the US, everybody hates the guys at the top (so being the boss at the top, is stupid) unlike the US. china did not do good things in WW I and WW II to generate lots of goodwill first. SO there is nothing to balance out the, Jealousy Envy, and more than justified complaints, that china is a, liar, cheat, and thief.

          Which brings us back to what to do with all those dollars, just like the massive hoard of silver. china amassed before the opium period, that caused the opium period, and wars.

          Before the Opium Period, china cause a global silver crisis (Silver being teh $ of the day) due to its unfair and restrictive trade practices. Which did not end well for china.

          In its bid to remove the $ as the global reserve currency prematurely. I see china possibly creating a global $ crisis. History says that will not end well for china either.

          Again when you owe the bank 10K you have a problem, when you owe the bank 10T the bank has a problem. Greedy CCP china, that wants to run before it can walk, doing in 50 years, what took western nations several hundred, is the bank here.

          Before the Opium period china PHYSICALLY HAD THE SILVER. It was not possible to just freeze all the treasury’s and other assets china and its state companies held, today it is. china is already seen as a global predator, using economic, instead of military warfare. America is only just waking up to the possibilities in this, it would not be to hard to justify such action.

          china needs to be very careful how it goes about resolving its $ and American asset. Hoard.

      • Nick Kelly
        Apr 17, 2018 at 10:27 pm

        So China says: we want to sell our US bonds.

        The Fed credits China with x trillion and retires the bonds. The US$ falls in response,which is what the US has been trying to engineer and makes easier the next question for China: now you’ve got all these dollars would you like to buy something?

        Seriously, the US is heading for a one trillion deficit PER YEAR.
        China’s 1.7 T or whatever is a factor but not the Sword of Damocles some of these doom- day scenarios would have it.

        That sword is internal, not external. Too much promised by govt to too many people, or in one word, demographics.

      • kf6vci
        Apr 18, 2018 at 10:11 am

        “China” as a central bank or the government? Or – rather – its citizen?

  4. mijj
    Apr 15, 2018 at 3:27 pm

    the Dollar’s place is as solid and eternal as the Berlin Wall.

  5. Ev Last
    Apr 15, 2018 at 4:02 pm

    It is not a question of supremacy, it is a question of market share; and the RMB is and shall continue increasing in market share at the expense of its weaker rivals.

    • d
      Apr 16, 2018 at 6:11 am

      “and the RMB is and shall continue increasing in market share at the expense of its weaker rivals.”

      Some People in Berlin, who tell the people in Brussels what to do, have other ideas.

      “Germany is currently like a frog being slowly boiled by china and unsure if it is really time to jump out of the pot yet”

      “There must be RECIPROCITY in our trade with china, either we must be allowed to do in china, what they can here, or they can not be allowed to do here, what we can not do in china”

      “a win win trade deal with china, is 2 wins for china”

      All from the mouths of German minsters, and senior officials, recently.

      The Eu and Germany are not the US. They do not scream, yell, threaten, and tariff, to make their point.

      china has already lost the trade war with Europe, as the European minds that matter, now have a mindset, which no longer sees china, as a trade partner, but as a threat, and an aggressive, unfair, competitor.

      china has issues with its two biggest hard currency trade recipients.

      That is a big problem for china, and the rest of the planet.

      Here most of us understand, the global economy that relies on the hard currency nations. May be able to shoot its way out of this mess, but it can not QE its way out of this mess.

      china still will not admit how much direct and indirect QE it is using. Let alone that there is an ever decreasing return on every new RMB printed china has probably passed the point of return per individually printed RMB and is now on the scale of % of 1 RMB return per 10 or 20 printed.

      Nor will china talk about it’s NPL issues that it resolves by instructing banks to convert NPL’S in Equity at rates dictated by the state, hold those “assets ” at rates dictated by the state until the state gives consent for the bank to sell them, if the bank can find buyers, at the state dictated prices.

      If this trade spat develops into a serious global slow down, it could be the Economic Black Swan. Beijing can not control, by any other mean than going to war, to enable and justify, harsh internall economic frugality. Just as Mao entered Korea for the convenience of being a “State at war” with all the extra powers that gives the state, without much objection from the population.

  6. TXRancher
    Apr 15, 2018 at 4:38 pm

    Requirements for world reserve currency:
    1) Stable value
    2) Banking transparency
    3) Established economic nation with strong laws

    The communist yuan does not and will not ever meet these requirements.

    • Rates
      Apr 15, 2018 at 6:22 pm

      And the US somehow meets the above requirements?
      1. Stable value. Since the dollar became the reserve currency, it’s lost 90% plus of its value.
      2. Banking transparency. What a riot. Were you just born yesterday? Why don’t you enlighten us with some facts about our derivatives market, most of which are done OVER THE COUNTER. How transparent is that huh?
      3. Strong laws for whom? Hillary Clinton? The bankers involved in the 2008 crisis?

      There’s ever only been TWO requirements for world reserve currency:
      1. Perceived military strength.
      2. Desire to have one’s currency be so.

      • JZ
        Apr 15, 2018 at 7:48 pm

        Military strength and the willingness to make others use your currency. Agreed! But unlike WWII where all the nations in Europe were in ashes and they had to use dollar as currency to buy stuff from US to build their countries, today, you can NOT point a gun at China’s head and force them to use USD. What you do is to reduce middle east into ashes and force them to only take USD for oil. So I think this petro yuan would have an impact, until US will use its military to reduce some nations to ashes again.

        • JZ
          Apr 15, 2018 at 7:50 pm

          Oh, I forgot, everybody had nukes now. Hmmmmmm..

        • Rates
          Apr 15, 2018 at 9:03 pm

          It’s simpler than that. The US is a country that’s in decline. What Wolf is describing is not even a scenario. From the next recession onwards, the US will be shown as a country that’s been in self destruct mode for a long time.

          Basically no one needs to challenge the US for anything. The internal contradictions alone will blow this country apart.

      • Frederick
        Apr 16, 2018 at 3:09 am

        Thank you Rates Somebody had to do it

      • Nicholas Castellanos
        Apr 16, 2018 at 6:23 am

        I think convertibility into gold or silver should be on that list. I’m no expert but when the British pound was the reserve currency, there was no Bretton Woods type situation which established reserves in pounds. Pounds were in demand because of Britain’s national strength, and convertibility. I wonder if going forward, no un-backed currency will ever again be treated as a reserve. The US experiment in this is there for all to see. It works for awhile, until it doesn’t.

    • FDR Liberal
      Apr 15, 2018 at 6:29 pm

      TXRancher,

      I would add the world’s best equipped navy to safeguard the shipping lanes in international waters.

      • raxadian
        Apr 15, 2018 at 6:57 pm

        The British Empire once had all that, yet the British Pound was never the World currency, back then people used gold instead.

        The Dollar won’t remain the world currency forever, but the it will keep being it for a few decades more.

        And Silver is back to being just slighty less sought that Gold.

    • Blockhead
      Apr 15, 2018 at 6:37 pm

      It is debatable whether the US dollar satisfy your three criteria.

  7. IronForge
    Apr 15, 2018 at 9:37 pm

    Not a replacement; but an option.
    IMF-SDRs(where USD and CHY are components), the CHY, and Physical Au should continue to be utilized as “Reserve Currencies”.

    Thanks to the CHY to Au Exchange Mechanism in place – along with Direct Au for Petrol Trade IND and IRN are engaged in, the World will no longer need the PetroDollar Scheme to buy Petroleum. Thanks changes everything.

  8. Terex
    Apr 15, 2018 at 10:05 pm

    Just ask a chinese were he wants his monwy, if he could choose

    • Frederick
      Apr 16, 2018 at 3:11 am

      Most would probably choose precious metals The informed ones anyway

      • Nicko2
        Apr 16, 2018 at 7:33 am

        Most would choose hard assets in western countries, ie real estate…enabling themselves and family members to gain visas/passports and immigrate.

  9. Rick Horocholyn
    Apr 15, 2018 at 10:34 pm

    Wolf, there is ongoing confusion in how to name Chinese currency. In the US, currency name is “dollar”, and to answer ‘how many?’ it’s “dollars”. For China, the currency is called “renminbi” (“people’s currency”), and to answer ‘how much?’ it’s ‘yuan’.

  10. KiwiinCanada
    Apr 16, 2018 at 9:38 am

    If the US dollar was not in such high demand externally, would not its value be lower in other currency terms? The value of the US dollar necessary to obtain a current account balance of zero where exports of goods and services exactly balanced imports of goods and services, might actually be in the region of 50% of its current value in Yen and Euros.

    The implication of this devaluation would over time be much greater activity in the US in tradable goods and services, which would be necessary to replace expensive imported goods and services.

    It is not clear to me that such a theoretical outcome would be an unqualified negative for the US.

  11. MC01
    Apr 16, 2018 at 10:20 am

    I suspect there would be a whole lot more enthusiasm for the yuan as a reserve currency, not to mention a means of settling international payments, if China had a monetary policy more suited to her state as the world’s top economic powerhouse.
    As broken and devalued as the US dollar, the euro and the rest of traditional reserve currencies are, they are paragons of monetary stability compared to the Chinese yuan, the Indian rupee, the Brazilian real and pretty much every single “emerging” currency.

    China last devalued the yuan in 2015, and has been openly considering doing it again as tit for tat for Western tariffs on their exports (remember EU tariffs on Chinese cold rolled steel are far higher than US ones). This is how South Korea behaved in the 70’s, way before Samsung and LG became global powerhouses.
    China did herself no favors and the IMF helped fuel rumors the inclusion of the yuan among their officially-sanctioned reserve currencies just after such a stunt was due to political pressure, the exchange of suitcases full of used banknotes (most likely not renmimbi) or a combination of both.

    In spite of all the propaganda (mostly originating in Beijing for the benefit of gullible Westerners), Iran is still very wary of the yuan as a means of payment for oil and natural gas exports. While officially (reality as usual is another matter completely, especially when it comes to the US dollar) the yuan is one of the accepted currencies and the Iranian Oil Bourse in Kish does price some oil mixtures and futures in yuan, in reality China pays for her oil and natural gas in euro, UAE dirham (pegged to the US dollar ;-) ), Swiss francs, Canadian dollars… pretty much everything but the yuan.
    The Chinese currency is apparently reserved for occasional stunts and especially to greatly annoy India, with which NIOC (the Iranian State oil and natural gas company) has a long running dispute over payments.

    Of course should China get serious about the yuan I have no doubt there would be a whole lot of enthusiasm for her currency.

  12. sierra7
    Apr 16, 2018 at 5:50 pm

    I’m really delighted to read all the different opinions from those who I know (I think) can proffer better opinions than I about the strength of the dollar/as a dominating world currency. So if I feel confused I’m not. That’s heartening!!

  13. MASTER OF UNIVERSE
    Apr 16, 2018 at 6:19 pm

    USD is losing market share to China because the USA is untrustworthy as a leading world reserve currency and communist nations like the Russian Federation, China, and North Korea, want to conduct business to their combined advantage instead of giving the advantage to the USA. What these countries have understood is that they can take the profits, and currency utility, for themselves instead of allowing the USA to appropriate it through monopoly control of their oil reserves, and petrodollar primacy on global markets.

    In this respect the petro-yuan sanctioning on global trading markets is a clear signal to all in the world that USD market share is poised to implode as soon as sovereign nations realize that they can control USD by opting to buy oil in petro-yuan whenever the USA does something sovereign nations don’t particularly support.

    China is ruling the world via Communist ethos whereas the USA has been ruling the world by violence & death squads for a couple of hundred years or more.

    The petro-yuan is controlled by the people whereas USD is controlled by unscrupulous bank holding companies that risk the wealth of nations and American taxpayers for their own proprietary trading desk objectives. When the house wins the profits accrue to the shareholders. When the house attains a loss the losses accrue to the taxpayers.

    It’s a win win solution for the bank holding companies, and an eternal losing proposition for the citizens.

    MOU

    • Nick Kelly
      Apr 17, 2018 at 10:37 pm

      This can’t be real. This guy is either being the most clumsy sarcastic or the most clumsy commie shill.

      If the latter he should be sent to a shill re-education school, where you are trained to create PLAUSIBLE BS.

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