Crossborder Settlements: A Story to Watch

Sunday, July 5, 2009 22:27
Posted in category Invest in China
Comments Off on Crossborder Settlements: A Story to Watch

Over the past few months, a new trade related story has begun to pick up steam, the settlement of crossborder trade in various currencies other than the US Dollar.  At first glance it is a story that does not catch the eye, because it is often laden with economic analysis that is less than exciting, however its impact (over the long term) could be significant.

As my good friend Denis McMahon highlights in his article today, Banks Sign Agreements on Yuan Trade, and in his previous piece, China Sets New Yuan-Clearing Process, China has started a process within Asia that would (potentially) remove the USD from trade contracts.  A move that, over time, could significantly reduce it USD surpluses, its need to sterilize vast amounts of USD, and its need to purchase USD denominate Treasuries.

Working on a solution to diversify its currency holdings through trade, this is not be a process that will lead to immediate short term relief for Beijing, particularly those who are worried about the value of the US Dollar.  If successful, it will alleviate future pressure over the short-to-near term from additional USD stock piling, but more importantly, it would build the business case to further expand the program on a wider basis (below the equator economies first) and to reduce the pressure of central bankers to have to offload the USD they currently maintain.

A story to keep a close eye on going forward.

Both comments and pings are currently closed.
Tags: ,