Friday, March 9, 2012

China lending in yuan with Brazil, Russia, India, and South Africa

China's efforts at dollar replacement are getting quite serious, in the final phase of internationalization at this point: providing loans in their own national currency.

Of course this whole thing is prompted by the U.S.'s heavy-handed use of forcing everyone who uses dollars to participate in the U.S. economic boycott on countries like Iran. Rather than have their foreign policy highjacked by U.S. decision-makers, these countries are sensibly setting up their own alternative trade arrangements, which will be immune to U.S. bullying.

Forcing other countries out of the U.S. dollar is like shooting our own feet, i.e., totally self-defeating. We will continue to see powerful inflationary effects as more and more dollars are displaced from international trade. The dollar becomes worth less and less, and everything we import becomes more and more expensive. Our cost of borrowing goes up as well, and eventually we will have to balance our government budget. This is not going to end well.

The article:

China is reportedly to begin extending loans in yuan to BRICS countries in another step towards internationalizing the national currency and diversifying from the US dollar.
­The Chinese Development Bank wants to sign a memorandum of understanding with the country's partners from BRICS group of developing countries on increasing yuan-denominated loans, while partners increase loans in their national currencies, The Financial Times reports, citing people familiar with the talks.
The move aims to increase trade volumes between the five nations and diversify from using the US dollar.
Brazil and South Africa were quick to react to the proposal, saying they expect the lending pledge to be included into a master agreement to be signed in New Delhi on March 29.
“We will discuss the creation of structures and mechanisms for lending in local currencies in order to maximize economic and financial transactions between the countries that are members of the accord,” Brazil’s development bank BNDES said.
China, with 54 per cent of its foreign reserves in US dollars, has been trying to diversify from the currency it believes will weaken soon and for a protracted period.
China agreed to use national currencies with Russia, Belarus and Japan for bilateral trade. The country also decreased its foreign reserves in dollars recently in favor of the Australian and Canadian currencies.

more details about the participants:

LONDON, March 7 (Reuters) - China is planning to extend renminbi loans to other major emerging BRIC countries, in another step toward the expansion of the yuan's role in foreign exchange, the Financial Times reported on Wednesday.

The China Development Bank (CDB) will sign a memorandum of understanding at a meeting with its BRICs counterparts - Russia, South Africa, Brazil and India - in New Delhi on March 29, the newspaper reported, citing people familiar with the talks.

Under the agreement CDB, which lends mainly in dollars overseas, will make renminbi loans available, while the other BRICs nations' development banks will also extend loans denominated in their respective currencies, the FT said in an article published on its website.

The renminbi is the official currency of China and its primary unit is the yuan. Of the six largest economies in the world, China is the only one whose currency does not have reserve status.

The initiative aims to boost trade between the five BRICs nations and promote use of the renminbi, rather than the U.S. dollar, for international trade and cross-border lending, the FT said.

In the past few years Chinese authorities have begun to gradually internationalise the currency before fully liberalising China's capital account. Much of China's banking system, however, remains regulated, and lending is largely controlled.

BNDES, Brazil's development bank, and South Africa's Finance Ministry were cited by the FT as saying they expected an agreement to be signed at the New Delhi meeting, which would include the lending pledge, with details to be ironed out during a summit.

"We will discuss the creation of structures and mechanisms for lending in local currencies in order to maximise economic and financial transactions between the countries that are members of the accord," BNDES was quoted as saying.

Other signatories would include Russia's Vnesheconombank, the Export-Import Bank of India and the Development Bank of Southern Africa, according to the article.

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