De-Dollarization Accelerates With Treasury Bond Sales and Creation of the AIIB

De-Dollarization and the Asian Infrastructure Investment Bank.

As de-dollarization continues, paradoxically the dollar is rising.

Fed talk still trumps international actions.

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Update January 5, 2016: China to launch Yuan Gold Fix

De-dollarization accelerates while the U.S. Dollar Index (DXY) also rises.

The DXY has risen nearly 20% the past year despite an acceleration of de-dollarization initiatives including increasing sales of U.S. Treasury Bonds by Russia and China and most recently, the creation of the Asian Infrastruture Investment Bank (AIIB).

The dollar’s rise is based on the premise that the U.S Federal Reserve (Fed) might be raising interest rates, something they haven’t done in nearly a decade. All the focus is on that potential.

Forgotten is that over the past decade the Fed has reckelessly created a housing bubble and bust and then compounded their error by printing over $4 trillion to buy near worthless mortgage backed securities from the too big to fail banks and to purchase over $2 trillion in U.S. Treasury Bonds, thereby assisting the U.S. government in increasing its massive deficit.

The interest rate hike talk makes the Fed appear like prudent hawkish stewards of the dollar, when nothing can be futher from the truth. As the U.S. economy continues to deteriorate, we can expect the Fed to return to its true monetizing debt self.

The Price of the “Recovery”

Fed holdings of U.S. Treasury Bonds

The U.S. Federal Reserve held $2.459 Trillion in U.S. Treasury Bonds as of March 2015.

What Chinese De-Dollarization Looks Like:

While much of the financial media attention is focused on what Janet Yellen and the Fed might say or do, international de-dollarization efforts are accelerating.

China’s de-dollarization efforts are less focused on selling U.S. Treasury Bonds and more focused on increasing global use of the Chinese Renminbi or Yuan, including the following initiatives:

Asian Infrastruture Investment Bank

The most ambitious Chinese de-dollarization initiative to date is the recent creation of the AIIB. The AIIB was set up to finance infrastructure projects throughout Asia.

U.S. and NATO allies have disregarded U.S. entreaties not to join the AIIB. Despite U.S. objections, Australia, Netherlands, Brazil, Turkey, UK, Switzerland, New-Zealand, Luxembourg, Italy, Germany, France, Austria, Denmark have signed on to participate in the AIIB.

U.K. Prime Minister David Cameron has been quoted as saying with regard to the U.K’s involvement with the AIIB: “There will be times when we take a different approach. We think that it’s in the UK’s national interest.”

Japan, a staunch U.S. ally and historic foe of China will be holding talks in June regarding their participation in the AIIB.

Some commentators have referred to the inclusion of U.S. allies in the AIIB as a “humiliation” for the United States.

Inclusion of China in the SDR Scheme?

China is making a bid for inclusion in the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs) basket of currencies later this year. If such inclusion does not happen or on terms suitable to the Chinese, China is setting up the infrastruture to perhaps bypass the IMF entirely. For more on SDR’s, see “What Are SDRs

China International Payment System (CIPS)

China is working on creating the China International Payment System (CIPS) as an alternative to SWIFT, the dollar based international transaction payment system. CIPS will faciliate Yuan based international transactions and is expected to be completed by the end of 2015. Even without CIPS, international yuan payments are increasing faster than payments across all other currencies, according to SWIFT.

Creation of Yuan Clearing Banks

The People’s Bank of China (PBOC) has increased the number of banks that can officially clear Yuan transactons to 14 up from just four a year or so ago. China and the United Kingdom set up a Yuan clearing bank in London in June of 2014. Since December 2013, China has established Yuan clearing hubs in Hong Kong, Macau, Tawain, Singapore, UK, Germany, South Korea, France, Luxembourg, Quatar, Canada, Australia, Thailand and Malaysia. France, Switzerland and possibly the United States may also set up Yuan clearing hubs.

Creation of Yuan Swap Facilities to Create Yuan Liquidity

China has signed a slew of bilateral currency swap agreements with other nations, including a 200 billion yuan ($32.9 billion) swap deal with the United Kingdom last year. China has signed nearly thirty such Yuan currency swap agreements since 2008, including ones with the European Union (2013), Australia (2013), Switzerland (2014) and Canada (2014).

Chinese Selling of United States Treasury Bonds

China has been selling off its massive U.S. Treasury holdings over the past year. China, however, still holds well over a trillion dollars of U.S. Treasury Bonds.

Chinese U.S. Treasury holdings chart

China has been gradually shedding its U.S. Treasury holdings.

Update October 16, 2015

While Chinese U.S. Treasury bond holdings have remained relatively contant over the past eighteen months, Belgium’s holdings, often considered a proxy for China, have fallen precipitously.

Belgian holdings of Treasuries January 2014 to August 2015 chart

Belgium’s U.S. Treasury Holdings reached $359.9 billion in August 2014. By August 2015 they had been reduced to $110.7 billion.

Chinese Gold Buying, Importing and Mining

Chinas has become the world’s largest gold producer and importer while also setting up the Shanghai Gold Exchange, a rival to the U.S. COMEX and The London Bullion Market Association precious metals exchanges.

Chinese Gold Mining Production

Chinese mining production chart

China is the world’s largest gold producer with mining production over 400 tons a year.

The Rise of the Shanghai Gold Exchange

shanghai gold withdrawals for the week ended march 27 2015 chart

The Shanghai Gold Exchange has grown exponentially in the past few years.

For a chronology of China’s gold activities over the past year see “China and Gold

Lower Oil Prices and the Dollar

The recent slide in oil prices caused by increased Saudi Arabian and U.S. shale oil production and reduced global demand is also impacting demand for the dollar. Under the U.S./Saudi Arabian petro dollar arrangement, Saudi Arabia prices and sells its oil only in U.S. Dollars.

As demand for oil decreases, demand for dollars to pay for it also decreases.

Since the United States has boosted domestic oil production, its need to import oil from Saudi Arabia has decreased, which means fewer dollars flowing from the United States to Saudi Arabia.

Saudi Arabia is selling more of its oil to China. The petro dollar arrangement makes makes less sense today than when it was struck in the early 1970’s. As China buys more oil from Saudi Arabia it makes little sense to use dollars to conduct their transactions, and more sense to use the Yuan, although China has a war chest of U.S. Treasuries it could use as payment.

In addition, with rising global debts, many of them denominated in U.S. dollars, and the rising potential for default, any non payment defaults on those debts will require fewer dollars.

While the financial markets focus on the Fed and their incessant talking up of a recovery that hasn’t occured, they’d perhaps be better served focusing on the rapid de-dollarization that is occuring globally.

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Further Reading:

Foreign Holdings of U.S. Treasury Bonds (updated monthly)

China Gold Fund for Silk Road

Janet Yellen and Negative Interest Rates

What Are SDRs?

Why Saudi Arabia Matters in Helping Keep the Dollar as the World’s Reserve Currency

Chinese Gold Mining Production

China and Gold

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