American Fiscal Chaos Pushes Nations to Pursue Yuan

qingmingWhile Republicans and Democrats in the United States were taking debt negotiations toward another potential cliff, China was not so silently making deals to bypass using the U.S. dollar when handling bilateral trades.

On October 11th Chinese media Xinhua announced an agreement between the European Central Bank (ECB) and the People’s Bank of China (PBOC) to swap currencies to the tune of 350 billion yuan (US$ 57 billion). According to the report, the agreement will last 3 years but may extend longer if both parties agree to extend it.

The deal marks the second largest currency swap the PBOC has made to date. The first being a 360 billion yuan (US$ 58.7 billion) agreement with South Korea that took place in two waves, first in 2009 and then in 2011. The deal is set to expire in October 2014 barring mutual agreement to keep it active.

The increase in currency swaps between China and other foreign central banks suggests a rise or at least further solidification in trade. However, some Chinese exporters are getting nervous as the yuan is starting to gain ground against the dollar. Further currency appreciation, they fear, could negatively affect exports. Chinese officials in Beijing, on the other hand, seem to welcome the strengthening yuan. A stronger currency could mean increased domestic consumption, the sign of a balanced economy.

Open Currency Swap Agreements – China[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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