China, Japan to trade in local currencies

[panduranghari]

supported by largest export, RMB would be one of main hard cash and rivals for USD.

Once ,I also though so were euro...however, I now am afriad that euro would disappear in one decade.

Why do you think Euro will disappear?

 

[badguy2000]

Why do you think Euro will disappear?

greece is just the first one of domino offect

there are so many lazy deindustrialized economies in Euro zones,such as Spain.
Germany can not burden so many lazy guys forever.

 

[panduranghari]

greece is just the first one of domino offect

there are so many lazy deindustrialized economies in Euro zones,such as Spain.
Germany can not burden so many lazy guys forever.

http://defenceforumindia.com/forum/europe-russia/31888-european-debt-crisis-posture.html#post424875

Don't believe all the noise, and there's a tonne of it right now. They don't know what they are talking about. The euro survives and thrives regardless of how the European debt crisis is ultimately resolved, and no countries will leave the euro. In fact, there are countries trying to get in, and none that will leave short of a coup, revolution or state failure, which isn't even a consideration right now. And even if that happens, the euro will still survive and thrive while the country that leaves will suffer greatly, the local hyperinflation that will ensue being the least of their problems.

Spend some quality time with the Eurosystem's balance of payments and marvel at how remarkably balanced Europe is with the rest of the world. Then compare that with the US (AND UK) balance of payments. As just a quick example, in April (one month) the Eurozone imported only €4.1 billion more goods than it exported. The US, on the other hand, imported $58 billion more goods than it exported, and April was the lowest month yet this year for the US. Of course that's just goods. For services, the US exported $14.5 billion more services than it imported. How much of that do you think was "Wall Street financial services"? Europe also exported more services than it imported, but only €2.8 billion.

So for goods and services combined, the Eurosystem ran a trade deficit of €1.3 billion in April, while the US ran only a $43.5 billion deficit (down from its previous normal $50 billion, but back up in May). Looking back at 2010 (just to get a full year's picture) the US ran a $500 billion goods and services deficit for the year. The Eurosystem (even with those lazy PIIGS) actually ran a trade surplus for the year, exporting more goods and services than it took in! So how can that be? As a currency representing a community of more than 300 million people, the euro is quite healthy compared to the dollar!

Of course there is a huge imbalance inside Europe between the states running a large surplus and those running a large deficit. But with a shared currency the adjustment pressure for such an imbalance is foisted elsewhere, not on the currency. It lands squarely on the politicians, who couldn't be a more deserving bunch of Aholes. For the dollar, the structural deficit and debt of the US places a massive devaluation pressure directly on the dollar. But for Europe the currency is balanced with no (or very little) adjustment pressure.

The economic flow of goods and services within Europe will of course have to contract as the imbalance retreats. If the euro weakens on the global currency stage Europe will start running an overall trade surplus again, like China, which will soften the blow of a contracting internal economy. If the euro strengthens, things like cheaper oil will help soften the contraction. Internally the politicians have their hands full. No doubt! Externally, the euro is just fine. To the euro the politics of the PIIGS and Germany are little more than a sideshow.

And notice I didn't even mention gold yet. Anything that would appear to seriously threatens the euro, like an outright sovereign debt default, would explode the price of gold which would simultaneously rescue the euro balance sheet and kill the dollar.

 

[panduranghari]

Renminbi's mysterious rise: trade finance or interest arbitrage?
May 29, 2012 2:09 pm by Robert Cookson


High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email [email protected] to buy additional rights. Renminbi’s mysterious rise: trade finance or interest arbitrage? | beyondbrics

Something funky is going on with the renminbi.
Swift, the global payments network – essentially an all-seeing eye over the global banking system – has released some intriguing new data about the international use of the Chinese currency.
While the renminbi accounts for just 0.34 per cent of all international payments, this year it has accounted for 4 per cent of global issuance of letters of credit (LCs), instruments used to finance trade.
Or to put it another way, the renminbi is one of the least-used currencies in the world when it comes to all payments, in sixteenth position, but it is now the third-biggest currency for LCs, after the dollar and the euro (see chart.) This is all the more remarkable because international transactions in renminbi only became possible three years ago.

Source: Swift

What's going on? In its press release on the data, Swift didn't suggest why such a large proportion of renminbi trade involved letters of credit.
But beyondbrics can take a stab at an explanation. Our best guess is that Chinese companies are using renminbi-denominated LCs as a clever way to arbitrage the onshore and offshore financial markets.
Remember, Beijing retains extensive controls on the movement of capital between the Chinese mainland and the rest of the world. Trade is one of the few permitted routes for the renminbi in and out of the country.
Letters of credit, therefore, open up all sorts of possibilities for savvy companies. Traditionally, companies use LCs to provide iron-clad guarantees to their international trading partners that they will be paid on time. Issued by banks, LCs ensure that payment will be made for goods once they are delivered at a specified date in the future.
But as the FT reported in November, Chinese companies can also use LCs to pierce the country's capital controls and borrow more cheaply offshore.
One of the main types of arbitrage works as follows. A Chinese company places renminbi on deposit with a mainland bank, earning an interest rate of about 3.5 per cent. The company then obtains a long-dated, renminbi-denominated letter of credit from the bank, ostensibly to pay for a shipment of goods from its own subsidiary in Hong Kong.
In turn, the Hong Kong subsidiary takes the letter of credit to a local bank and uses it as collateral to obtain a US dollar loan at a lower interest rate than those available on the mainland. In many cases, the company would also use a currency derivative to eliminate the foreign exchange risk. The end result: the company has captured the difference between onshore and offshore interest rates, less banker's fees.
From the looks of the Swift data, this kind of activity is occurring on a big scale. As shown in the chart below, most of the LCs are between mainland China and Hong Kong. Note also that almost all the LCs are going in one direction: out of China.

Source: Swift

For more evidence of the remarkable boom in renminbi letters of credit, we must turn to the Hong Kong Monetary Authority. HKMA data show that Hong Kong banks' claims on banks in mainland China – a statistic that includes letters of credit – reached HK$1.53tn ($196bn) as of August, having jumped sixfold from just HK$252bn when the renminbi trade settlement scheme started in June 2009 (see chart.) These data are important, as they suggest that Hong Kong banks have indeed been lending against letters of credit from the mainland.

Source: Hong Kong Monetary Authority

Why should we care about all this? For a start, it suggests that Hong Kong banks have a large exposure to mainland banks sitting on their balance sheets and that discounting LCs has been a big driver of revenues in recent years.
But there is a broader point too. If international trade in the renminbi is largely driven by financial arbitrage, as the extraordinary use of letters of credit implies, then Beijing's plan to internationalise the renminbi is not exactly going according to plan.

 

[no smoking]

I agree with you partly. I do agree that US has got here due to its ability to print its and global currency. Hence it has a strong military.

Both Britain and America imposed their currency on the world as it at the initial stage was backed by GOLD.

No, at the beginning, they didnot impose their currency on the world. The world accepted it because everyone was buying almost everything from them.

It is the products that back up their currency not the gold. Gold is more like another kind of currency with more stable value and it is always acceptable by your supplier in any international trade. When people cannot use your currency to buy your products, they will buy your gold. When you don't have any valuable currency, yours or other's, to buy foreign products, you have to use your gold.

If you look into their history, you can find the same procedure:
1. They become the major supplier of the world
2. They accumulated a huge pile of gold
3. They link their currency to gold
4. They become the major customer of the world
5. They lost major deposite of their gold
6. They delink their currency to gold
7. They depreciate their currency

 

[panduranghari]

No, at the beginning, they didnot impose their currency on the world. The world accepted it because everyone was buying almost everything from them.

It is the products that back up their currency not the gold. Gold is more like another kind of currency with more stable value and it is always acceptable by your supplier in any international trade. When people cannot use your currency to buy your products, they will buy your gold. When you don't have any valuable currency, yours or other's, to buy foreign products, you have to use your gold.

If you look into their history, you can find the same procedure:
1. They become the major supplier of the world
2. They accumulated a huge pile of gold
3. They link their currency to gold
4. They become the major customer of the world
5. They lost major deposite of their gold
6. They delink their currency to gold
7. They depreciate their currency

You got it backwards.

 

[panduranghari]

Britain ruled 1/4 of the world and its currency was backed by gold. You go and check the history.

America never ruled the world when Britain was the big boy. With the 1st WW, Britain lost its gold backing to the currency which Churchill tried to restore in 1925 and failed.

America took over from Britain and USD became the de jure global currency backed by gold. It was de jure not de facto.

 

[ice berg]

Just because their had gold standard does not means that every currency has to go though the same process. There were many nations who had gold standard. There is no correlation between gold standard in if-self and whether the currency can become a world currency.

 

[no smoking]

Britain ruled 1/4 of the world and its currency was backed by gold. You go and check the history.

Before rulling 1/4 of the world, Britian already became the major supplier of Europe. Their business model was selling the products to spanish for gold. And the fact was that Spanish was the one having the biggest pile of gold found in south america. That didn't turn their currency into world currency! Why, they hardly produce anything and no one need their currency to buy anything from them. In contrast, they used the gold to buy products from others.

America never ruled the world when Britain was the big boy. With the 1st WW, Britain lost its gold backing to the currency which Churchill tried to restore in 1925 and failed.

How did brtain lost its gold in the first place? They became the major customer of USA and the world.
Why can't Churchill failed? Because Britain was no longer the biggiest supplier of the world.