China Takes Another Step Toward Independence from US Dollar

China announced it will start direct trading with the Swiss franc. This is another step in China’s relentless march toward becoming a major player on the world financial stage and away from dependence on the US dollar.

According to a Bloomberg report, the link between the currencies will begin Tuesday. The move by the China Foreign Exchange Trade System makes the Swiss franc the seventh major currency that can bypass conversion into the US dollar and be directly exchanged for yuan.

The People’s Bank of China said it welcomed the move in a statement on its website:

This is an important step in strengthening bilateral economic and trade connections between China and Switzerland. And China and Switzerland will make further efforts to mutually promote the direct trading between the two currencies based on market principle. Development of direct trading between RMB and CHF will contribute to the formation of direct exchange rate between the two currencies. This will help lower currency conversion cost for economic entities, facilitate the use of RMB and CHF in bilateral trade and investment, promote the financial cooperation and enhance economic and financial ties between the two countries.”

The announcement comes as China presses the yuan’s case for reserve-currency status at the International Monetary Fund.

As we reported late last month, three people briefed on IMF discussions said a draft report by agency staff reached a favorable conclusion on including the Chinese currency in the Special Drawing Rights basket. One officer said the path forward appears clear.

Interestingly, a large amount of gold is being recast and imported into China from Switzerland. The Wall Street Journal reported a major surge in exports from Switzerland in September.

Exports of gold by key supplier Switzerland to Hong Kong rose to 59.8 tons in September, 65% higher than in August and the highest monthly volume in 1½ years, according to a Commerzbank report.”

Could facilitating this ongoing gold trade be one of the reasons for this new currency exchange deal? It certainly is a possibility. From a broader perspective, the general influx of gold into China almost certainly makes up part of a strategy to raise the yuan’s stature on the world stage.

 

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China has steadily increased its holdings of the precious metal since announcing the size of its stash in July. China likely added another 14 tons of gold to its reserves in October, based on Reuters calculations:

The value of China’s gold reserves stood at $63.261 billion at the end of October, compared with $61.189 billion at the end of September, the People’s Bank of China (PBOC) said on its website. Based on the London Bullion Market Association afternoon gold price on the last trading session of October, China’s reserves likely totaled 55.378 million troy ounces or 1,722.5 tons at the end of last month, Reuters calculations show.”

Many analysts believe the Chinese have increased their gold holding to stabilize the yuan, elevate its stature in the eyes of the international community, and ultimately pave the way to unpegging from the US dollar.

Chinese efforts to boost the yuan have proven effective. In August, the Chinese currency overtook the yen to become the fourth most-used currency for global payments. That was just some eight months after the yuan hopscotched the Australian and Canadian dollars to move from seventh to fifth in early 2015.

Peter Schiff said almost a year ago, shortly after China surpassed the US as the world’s largest economy, that he believes it’s only a matter of time before China and other countries jettison the US dollar altogether. A year later, it appears things continue to build in that direction.

Why I think they continue to be big buyers of gold, is because they’re preparing to jettison the dollar as their principle reserve. I think they are going to eliminate the peg. When they do, that’s going to be the birth of a new renaissance in China. You’re going to see China rise to a much greater degree. That’s going to be the sun setting on the American century. Without China’s support, we’re going to have to finally deal with the problems that have been building up in our economy for years. But China has spared us from having to deal with those problems.”

 

Peter Schiff is an American investment broker, author and financial commentator. He is CEO and chief global strategist of Euro Pacific Capital Inc., a broker-dealer based in Westport, Connecticut.