Ghana to Use Chinese yuan to ease burden of the local currency; other implications

I have recently noted that Ghana has been in the league of nations  that has pumped up money supply growth rate at over 30% in 2011 and or  2012.  (The Philippines may be included in this list where money supply rate has been above 30% for the past 8 months!)

The World Bank chart has been unavailable so I show the table instead. The above table reveals why Ghana currency, the cedi, has been in trouble. The Bank of Ghana has been printing money relentlessly since 2009.

Now reports say that the government of Ghana will now liberalize the use of the yuan in order to relieve the stress of the cedi.

From Citifmonline:

Bankers have hailed the imminent trading of the Chinese Yuan as a move that will help ease demand for the US dollar in the country’s forex market.

The value of the cedi, which has plummeted in recent times as a result of the pressure put on traders’ demand for the dollar, will see some recovery when the yuan comes in.

This will mean, businesses and traders dealing in the Sino region will not need to convert to any major currency before transacting business.

Dr. Benjamin Amoah, Head of Financial Stability at the Bank of Ghana (BoG), has said that the central bank has made significant progress in getting the yuan into the country’s currency trading system.

“Work is far advanced in getting the yuan into the system because we have seen that it is needed – and demand always creates supply, so we are trying to make it available and we are working on it; very soon it will start. I don’t want to put a time on it.

“Currently, the demand is for the yuan because a lot of people go to China,” he added.

There are two aspects to cover here. One is the role of money printing in determining the health of the domestic currency and second is the role of the US dollar as international reserve.

Of course the real reason why the demand for the US dollar has been exceedingly strong in Ghana has been due to the frenetic pace of money pumping by the central bank, the Bank of Ghana from 2009-2012, as I noted above.

But since money supply growth has reportedly  declined to 17.7% in 2013, then this should ease some of the cedi woes, with or without liberalization of the yuan. 

However such liberalization will only function as a secondary cause. Considering the competition from the yuan, the Bank of Ghana will now be forced to considerably restrain money printing, otherwise the average Ghanian will gravitate to use the yuan as store of value.

So a recovery in the cedi will come as money printing by the Bank of Ghana eases. But, imbalances brought about by previous money printing will likely surface.

The second aspect in the above story is the role of the US dollar. 

The liberalization of yuan or increased used by the Chinese currency by people in Ghana will deepen the yuan’s role as foreign currency reserve. 

Aside from Ghana, Zimbabwe has reportedly added the Chinese currency as one of the four Asian based legal tender that includes the Australian dollar, the Japanese yen and the Indian rupee (Business Day Live).

The internalization of the yuan can be seen via broadening of dim sum bond floats, numerous swap agreements with various nations, trade in yuan with trading partners as Russia. The yuan is now the eight most traded currency in the world according to the wikipedia.org

This shows why the US feels threatened by China, as the increasing exposure by the yuan in world trade and finance risks diminishing the US dollar’s privilege as the world de facto currency reserve.

Yet brinkmanship foreign policies adapted by US authorities will only accelerate the US dollar’s decline.

Has the Fed’s Taper Talk induced foreign selling, swap and bilateral currency deals?

Has the Fed’s tapering inspired a foreign sell off in US assets and for countries to increase swaps and bilateral currency deals?

From Bloomberg:

Foreign investors were net sellers of U.S. long-term portfolio assets in August as China reduced its holdings of Treasuries to a six-month low.

The net long-term portfolio investment outflow was $8.9 billion after a revised $31 billion inflow in July, the Treasury Department said in a statement today in Washington. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, and China lowered its holdings of U.S. government debt for the second time in three months, the department said…

Today’s report showed China remained the biggest foreign owner of U.S. Treasuries in August even as its holdings dropped $11.2 billion to $1.27 trillion. Japan, the second-largest holder, increased its share by $13.7 billion to $1.15 trillion, the figures showed.

Based on updated TIC data (prior to June are unrevised), the Japanese (both investors and the government) have aggressively been buying USTs since Abenomics (must be signs of capital flight for private sector). 

However, the debt ceiling standoff has reportedly prompted for a net selling of USTs in early October.

On the other hand, China has posted a sustained decline in UST holdings since April.

Various Asian countries have undertaken ex-US dollar deals.

From Wall Street Journal Blog

On Tuesday, China and Singapore announced they would introduce direct trading between their currencies. Beijing also said it would allow Singapore-based investors to take yuan funds raised in the city-state and invest them in mainland securities markets.

Singapore follows in the footsteps of London – which gained so-called RQFII status last week – and Hong Kong. The move, designed to promote use of the yuan and broaden the investor base in China’s markets, builds on other measures taken recently that aim to reduce Asia’s dependence on the U.S. dollar.

Earlier this month China signed a 100 billion yuan ($16.4 billion) swap deal with Indonesia. It has existing pacts with Australia, South Korea and a number of European countries.

South Korea this month signed currency-swap agreements with Indonesia, Malaysia and the United Arab Emirates worth around $20 billion. Officials say they’re considering more such deals, in addition to existing pacts with China and Japan.

Swap agreements – in which central banks pledge to provide each other with currency, usually on a short-term basis – often are enacted during periods of financial turmoil, but more recently have taken on a greater role in trade and diplomacy.

The arrangements are small compared to use of the dollar for international transactions, which accounted for foreign-exchange turnover of around $4.65 trillion a day, or 87% of the global total, according to triennial survey conducted by the Bank for International Settlements in April.

Still, the swap deals help insulate Asian currencies a bit from the whims of speculative investors, and make it more likely their movements will reflect trade needs or economic fundamentals. China and South Korea got off relatively lightly during the market turmoil this summer, but some of those they’ve signed swap deals with — such as Indonesia — were hit hard as investors fled emerging markets.

It is true that currency swaps or bilateral domestic currency trades have been small, nonetheless such deals means that many Asian governments have been gradually redirecting or decreasing their exposures on the US dollar. As Chinese philosopher Laozi once said, a journey to a thousand miles begins with a single step.

China and Thailand have even undertaken a project to build a railway connection between the two countries, where Thailand will for pay for her share in the cost of railway construction via barter, particularly rice and rubber.

Also currency swaps are not a free pass or license for bubbles. They serve as possible cushion from currency based tail events. Mismanagement by governments will result to market crashes or crisis regardless of swaps.

And speculators don’t just drive markets up or down according to “whims”, but through perceived profit opportunities mainly based on changing expectations of fundamental conditions of specific political economies.

In other words, meltdowns don’t happen because of confidence alone, but because of perceived (rightly or wrongly) dramatic negative or adverse changes in fundamentals that incites an abrupt loss of confidence of market participants whose actions are ventilated on the markets via a stampede or panic.

All these foreign selling of US assets, swaps and bilateral trade or barter deals have been evident in the continued fall of the US dollar.

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BRICs Mull Bank to Bypass World Bank and IMF

Developing economies represented by the BRICs or Brazil Russia India and China, a popular acronym coined by Goldman Sach analyst Jim O’Neill, have been reported as intending to establish their own multilateral bank to bypass or breakout from the clutches of the influences of the US and the World Bank-IMF cabal. 

From Bloomberg:

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations -- Brazil, Russia, India, China and South Africa -- are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.

“The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.”

The growing role of emerging markets suggests of a commensurate expansion in geopolitical clout. From the same article:

The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe…

Trade within the group surged to $282 billion last year from $27 billion in 2002 and may reach $500 billion by 2015, according to data from Brazil’s government. 

But such plans are still on the drawing board…

While BRICS leaders may approve the creation of a development bank in principle at the summit, there’s still disagreement on how it should be funded and operated.

There is more than meets the eye from this development.

 

The BRICs has been expressing apprehension over central bank 'credit easing policies' adapted or imbued by developed economies led by the US Federal Reserve. 

Russia’s Putin calls Bernanke’s QEs as “hooliganism”. Brazil has blamed the Fed for inciting a currency war, and so with China’s censure of QE. 

And partly in response and also in part to promote advancing her geopolitical role, China has been promoting the yuan, via bilateral trade arrangements to the BRICs and the ASEAN.

BRICs along with other emerging markets have been major buyers of gold

Emerging markets led by the BRICs dominated buying in 2012 according to the Bullion Street:

Central bank buying lifted gold last year and is likely to do so this year as more and more emerging market central banks have become first time buyers in recent years.

Observers said central banks across the globe collectively bought more gold than they had previously over 40 years. The buyers were not the usual central bank suspects among the old world European nations, but emerging economies.

And also in 2011 (chart from Reuters)

And recent events in Cyprus only exhibits of the rapidly deteriorating state of the current central bank based fiat money system. 

As Tim Price at the Sovereign Man aptly commented

It matters because the inept handling of its crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks, and in unbacked paper currency itself, will be vulnerable to an unpredictable run.

So the BRICs dissension over the current system has been prompting them to "diversify" (euphemism for acquiring insurance through gold purchases), as well as, to work on creating an alternative system that would circumvent the US dollar standard, possibly with their own bank. 

Perhaps BRICs officials are becoming more aware of the warning given by the French historian and philosopher François-Marie Arouet, popularly known by his nom de plume Voltaire: Paper money eventually returns to its intrinsic value--zero.

China and Japan to Trade Currencies Directly

Speaking of severe credit dislocations triggered by a quasi collapse of the US banking system in 2008, bilateral trade financing has been a dynamic which emerged to fill in such a void.

Apparently, realizing the risks of another bout of a banking collapse, China and Japan will trade directly with the use of their respective currencies this June, which aims to bypass the US dollar, and the US banking system as well.

From the AFP

Japan and China are expected to start direct trading of their currencies as early as June as part of efforts to boost bilateral trade and investment, according to reports.

With the planned step, exchange rates between the yen and the yuan will be determined by their transactions, departing from the current "cross rate" system that involves the dollar in setting yen-yuan rates, Kyodo News said on Saturday.

The two governments are eyeing setting up markets in Tokyo and Shanghai, the Yomiuri Shimbun said.

The yen-yuan exchange system would help businesses in the world's second- and third-largest economies reduce risks associated with exchange rate fluctuations in the dollar and cut transaction costs, Kyodo said.

It will be the first time that China has allowed a major currency except the dollar to directly trade with the yuan, Kyodo said.

Well, this serves as another painting on the wall that heralds the twilight of the US dollar standard.

Video: Dr Marc Faber Optimisitic When Greece Exits, Sees Global Recession Very Soon

Interesting insights from Dr. Marc Faber's interview with the CNBC (hat tip Zero Hedge). Below are my notes:

-Germany will issue Eurobonds. Quality of euro will diminish

-Euro is oversold, potential to rebound along with stock market for the short term

-People are focusing excessively on Euro while ignoring the rest like India and China

[my comment: very true.]

-Danger level—any outright default by any countries. Better to take losses now than to wait for the risk of “gigantic systemic failure”

-Market will be relieved if Greece exited the Eurozone. There would be some clarity. It wouldn’t be good for bank and financial shares. The markets are oversold and on exit of Greece, I think markets would rally

[my comment:

Indeed. People hardly realize that the banking system is NOT the economy as mainstream pundits would have it.

While a banking meltdown may impact business activities over the short term (like 2008), the world does NOT operate on a vacuum, people will continue to trade and resort to other means of obtaining credit, e.g. consumer financing companies filled the niche of Japan's immobilized banking system as alternative sources of credit during post-bubble bust, in 2008 trades have been conducted through barter and through bilateral financing deals, during the recent Euro crisis, in Italy the mafia has stepped up the void as a major creditor

This will especially be true, if reforms would allow for greater economic freedom, which would allow parties to fill in the void. For instance, Walmart's application for bank license was turned down from opposition by big banks, unions and etc...]

-More and more stocks are breaking down around the world. He says that this means many economies are likely to weaken. We might see “some asset deflation”

[my comment: Dr. Faber seems to be vacillating from an oversold rebound to asset deflation.]

-We could have a global recession starting sometime in the fourth quarter of this year or early 2013—100% certainty

-Hold cash US dollars and some gold.

-Although gold prices may breakdown below the low on December 29 2011 of 1,522.

[my comment: the risks seems to be tilted towards a meaningful downdraft alright, which may signal some asset deflation or even global recession, but we can't rule out the possibility that political authorities, particularly of central bankers, may confront these with even more aggressive money printing measures, which again may defer interim trends.

Nonetheless, current environment highlights the state of uncertainty we are in]

Signs of Transitioning Financial Order? The Emergence of Barter and Bilateral Based Currency Based Trading?

In our previous blog, The Origin of Money and Today's Mackarel and Animal Farm Currencies, we pointed out how people responded to government’s action of banning money (such as prison community) or for society to lose confidence on the government decreed money (Zimbabwe).

We observed that when people lose confidence on the money government decrees on them or when they are barred from having to use “standard” money, people find alternative ways to select a media of exchange (Mackarel Money for California’s Prison or Barter for Zimbabwe).

And when we see governments similarly begin to use unorthodox means of transaction, we construe such action as emerging signs of diminishing faith in the present monetary standard.

This from yesterday’s news (courtesy of the Financial Times),

``Thailand on Monday said it planned to barter rice for oil with Iran in the clearest example to date of how the triple financial, fuel and food crisis is reshaping global trade as countries struggle with high commodity prices and a lack of credit.

``The United Nations’ Food and Agriculture Organisation said such government-to-government bartering – a system of trade not used for decades – was likely to become more common as the private sector was finding it hard to access credit for food imports.

``“Government-to-government deals will increase in number,” said Concepción Calpe, a senior economist at the FAO in Rome. “The lack of credit for trade could lead also to a resurgence of barter deals between countries,” she added.

``Officials and traders noted, however, that Iran was not typical because the US-led sanctions against its banks meant the country was facing difficulties financing agricultural trade even before the financial crisis…

``With some developing countries’ official currency reserves facing serious depletion, particularly in Africa and Asia, agricultural officials said countries could barter more to avoid exacerbating their current account difficulties."

Our observation:

True, while Iran’s conditions have been stymied by US sanctions, the fact that both governments CAN yet TRADE with each other with their homegrown resources can be construed as Paper money failing to deliver its role as medium of exchange.

The banking system as key conduit for the present framework seems being bypassed for barter (which accounts for hard currency trading outside the US dollar standard system).

So what we apparently have here is another instance where “full faith in credit” in the present global financial architecture seems being eroded.

Is this an isolated incident? We think not.

Just last September, Brazil and Argentina came across a system which aims to trade goods without using the US dollar.

According to the International Herald Tribune,

``Brazil and Argentina are ready to stop using U.S. dollars to trade goods between them.

``Brazil's president tells the Buenos Aires-based Clarin newspaper that exports and imports between the two nations will be bought and sold in local currency — reals and pesos.

``President Luiz Inacio Lula da Silva did not say when the measure would take effect.

``Silva says the move will boost bilateral trade, which reached $US17.6 billion so far this year through July.”

If you think this is a joke, you can check out this speech by Mr Henrique Meirelles, Governor of the Central Bank of Brazil on the Inauguration of the Brazil-Argentina Local Currency System last Oct 2^nd published at the Bank of International Settlements, where I quote (highlight mine),

``With elimination of a third currency in direct transactions among companies, exporters will set their prices in the currency of their own countries. Thus, they will be better able to calculate their margins precisely, since they will no longer be exposed to exchange rate risk.’

Does the concerns over exchange rate risk end here?

Nope, just today we got this news that China and Russia are contemplating a similar medium for payment or settlement.

From Russia Today (Hat Tip: Craig McCarty),

``The growing trade turnover offers both nations the chance to move trade away from dollars and utilising national currencies. In his address to the 3rd Russia-China forum in Moscow, Vladimir Putin stressed that the dollar based financial system was in a state of shock - and said the counterparties should consider using their own currencies.

``Aleksandr Razuvaev, Chief Analyst at Sobinbank says that the major product being traded - oil - can be denominated in Rubles from next year.

``“There is less trust in the dollar and there is an idea to build up regional currencies. It will be the Ruble in the CIS region, and the Yuan in the South Asian region. So there will be demand for Russian currency due to oil exports and for the Yuan due to imports from China. So there will be enough liquidity in both currencies.”

So from a “MICRO” level of Mackarel Prison economy to an “Animal Farm” national Zimbabwean economy, the unconventional means of transactions seems to be growing MACRO, involving more bilateral exchanges using national currencies or by barter.

It seems that we could be witnessing escalating signs of cracks from the present monetary order.