Hot on the heels of a deal inked just last month between the Bank of England and the People’s Bank of China which calls for the setup of a three-year swap line with a maximum value of about US $33 billion between their currencies, Canada’s banks and other players in the financial industry are considering setting up a currency trading hub for China’s Yuan in Toronto. By making an early move, the country is hoping such a first mover advantage would overcome its size disadvantage in the global race for a share of trading in the currency of the world’s second largest economy.
Elsewhere on the other side of the pond, the Germans are also nearing a deal which will help Frankfurt become the financial center for Yuan trading in Europe. In fact, similar bilateral currency swap agreements are popping up like mushrooms everywhere one looks – Brazil, Japan, Russia, Australia, Malaysia and many other trading partners of China.
What do these currency swap agreements all mean? Well, it means that trades between the two countries involved in the swap can be conducted in their respective currencies. For example, trades between China and Japan can be conducted and settled directly using the RMB and Yen, meaning that the intermediate step of converting everything to U.S. dollars and back can be bypassed. The end result is a reduced need for putting aside U.S. dollars for trade purposes (dollar reserves).
For now the amounts involved in the swap lines are relatively small and their impact on the overall dollar based global trade remains insignificant. Nonetheless, these baby steps are deliberate and orchestrated by the Chinese government to prepare the RMB to eventually become a fully convertible and, more importantly, reserve currency.
Over time the rise of the Yuan as a convertible currency and the Dollar losing its exclusive status as the world’s reserve currency is going to significantly impact the current Dollar-centric world. That day is now in sight and no longer beyond the horizon.