(snip)St. Petersburg, Russia - China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.
Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.
"About trade settlement, we have decided to use our own currencies," Putin said at a joint news conference with Wen in St. Petersburg.
The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.
The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said. (snip)
this has several potentially important overtones ...
- since US dollars will no longer be used as an intermediate trading point between China and Russia, the Wall St banks lose out on juicy currency exchange fees
- if neither Russia nor China need to buy US dollars in order to trade goods to each other, this implies that the international exchange rate ( thus purchasing power ) of the US dollar will drop
- If China cannot 'unload' trade surplus US dollars earned from sales of Chinese goods to America towards Chinese purchases of Russian goods, this leaves China holding an even bigger pile of US dollars that have no immediate purpose. This will probably drive China to use those US dollars to purchase 'real' commodities like oil, precious metals, agricultural products etc. in order to 'get rid of' those unwanted US dollars. This in turn will create pressure for higher US dollar denominated prices for oil, precious letals, agricultural products etc.
- any leverage that the US ever had with China in regard to 'tweaking' the US dollar to Chinese Yuan exchange rate will be even lower. This in turn will cause the US dollar denominated price of Chinese merchandise to rise.
- the US gov't will lose whatever seignorage earnings it was previously accruing from the printing / use of US dollars for transaction settlements between two foreign countries ...
(snip)"A very profitable type of seignorage is from the international circulation of banknotes. While the cost of printing banknotes is minimal, the foreign entity must provide goods and services at the face value of the note to obtain it. The banknote is retained because the entity values it as a store of value because of mistrust of the local currency.(snip) from Wiki



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