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Paradigm Shift

Death of the Petrodollar? European Central Banks Reveal Reserves Include Chinese Yuan




While the United States continues imperiously contending itself exceptional above all other nations, even its Western allies must recognize the sun setting fast upon American empire: European central banks revealed recently they’ve already invested in Chinese yuan — in some cases, dumping previously-sacrosanct petrodollars to bolster reserves with the currency — sounding the first creaks in a major pivot away from the once-monolithic superpower.

China has indeed scampered to prepare for the putative coming void left when the U.S. topples from its precarious throne — boasting itself dynamic and willing to play well with others — as People’s Republic President Xi Jinping vowed the nation should now “take center stage in the world,” Quartz reports; also noting internationalization of the yuan, or renminbi, as a goal. It continues,

“Two-thirds of the world’s $6.9 trillion allocated foreign exchange reserves are held in US dollars. The yuan took a major step towards broader international adoption in 2016 when the IMF decided to include it in the basket of currencies that make up the Special Drawing Right, an alternative reserve asset to the dollar.

“Still, as of the third quarter of 2017, just over 1% of foreign exchange reserves were held in yuan, according to the latest data from the IMF. Now, there are signs that this is about to increase.”

This week, the Bank of France disclosed its reserves partly comprised Chinese yuan — although officials declined to offer a breakdown of those reserves, nor did it indicate when the process began — with Germany’s Bundesbank indicating it would soon follow suit, asserting in a statement cited by Reuters,

“Currency reserves remain in their vast majority invested in U.S. dollar, with a diversification towards a limited number of international currencies such as the Chinese renminbi.”

Similarly, during a conference in Hong Kong, Bundesbank executive board member Andreas Dombret explained,

“The notable development from the European point of view over the past few years has been the growing international role of the renminbi in global financial markets.”

For seven decades, the petrodollar has more-or-less occupied the role of world currency; but — like its self-appointed and largely despised role as the world’s police — the position looks to be vacant soon.

Emile Simpson writes for Foreign Policy the shift in reserve currencies held by central banks evinces “the renminbi’s slowly growing acceptance as an international currency: Banks’ holdings of the yuan passed the $100 billion mark late last year, though it remains far behind global stalwarts like the dollar, euro, yen, and pound. The European Central Bank, which had already set up a currency swap line with the People’s Bank of China to grease two-way trade, just revealed that it dumped 500 million euro worth of greenbacks to add yuan to its reserves last fall […]”

Still, despite central banks acknowledging the transformation of reserves into yuan-friendly havens, the process inches along with all the speed of an iceberg — particularly as China maintains meticulous controls on the flow of currency — the vestiges of an intensely-scrutinized economy, which must be shed in order for the nation to achieve internationalization or fulfill its aspirations of power.

“China would have to substantially eliminate restrictions on international financial transactions in order for the renminbi to become a leading reserve currency,” said expert Barry Eichengreen of the University of California, Berkeley; but, “it continues to tighten restrictions.”

In the meantime, as Brown Brothers Harriman head of global currency strategy Marc Chandler told MarketWatch,

“There’s nothing quite like a falling dollar to spur talk of the erosion of the greenback’s reserve status.”

Image: ShutterStock/Openfinal.

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