Some central bankers consider the Chinese yuan, or renminbi, a viable alternative to the U.S. dollar.
The central banks of Chile, Indonesia, Malaysia, Singapore, Hong Kong, and China are creating a yuan reserve to facilitate international trade without dollars. Each central bank will deposit 15 billion yuan ($2.24 billion) in a reserve pool they call the Renminbi Liquidity Arrangement. The pool will finance trade and lending in yuan. To explain, the renminbi is the official name for the yuan, the currency of the People’s Republic of China.
Interestingly, the arrangement is not a Chinese-led effort. Instead, the Bank of International Settlements (BIS), the bank for central banks in Basel, Switzerland, is organizing the project. The BIS is an international organization headed by a Mexican General Manager, Agustín Carstens.
Nor is the arrangement an anti-American or a nationalist move. Notably, Russia is not taking part in the scheme. In fact, three of the countries in the arrangement, Chile, Indonesia, and Malaysia, are historic U.S. allies.
Nations Creating U.S. Dollar Alternative
The arrangement is an effort to create an emergency alternative to the U.S. dollar. To explain, the central bankers want international trade to continue if the dollar collapses.
The economies of all five Renminbi Liquidity Arrangement nations depend heavily on trade. Chile’s economy is based on the export of copper and other minerals. Indonesia is a major exporter of natural gas, oil, rubber, minerals, and palm oil. Malaysia is an exporter of electronics. Singapore is one of the world’s leading financial centers, and China is the world’s workshop responsible for 28.7% of global manufacturing output.
Without international trade, the societies, governments, and economies of all five nations could collapse. International trade depends on the U.S. dollar because the dollar is the world’s reserve currency. To explain, the reserve currency is the fiat currency that central banks, corporations, and big financial institutions use for cross-border transactions.
Thus, some major central bankers think the U.S. dollar is no longer safe and are seeking an alternative. Those bankers are using the yuan because the People’s Republic of China is the world’s second-largest economy and China has the second-most powerful military. In particular, China’s People’s Liberation Army Navy now has more ships than the U.S. Navy.
Why Central Bankers are Skeptical of the U.S. Dollar
Central bankers want an alternative to the dollar because they are afraid of civil unrest or violent political changes in the United States.
These fears exist because of the Jan. 6, 2021, riot at the U.S. Capitol. Central bankers and others watched a mob chase Congress out of the seat of government on television. Additionally, they saw the U.S. military fail to respond to violence at the Capitol.
Since then, speculation about a Second American Civil War has filled the U.S. and foreign media. Such speculation raises fears about the United States and the dollar.
The reasonable conclusion from a non-American observer is that the United States is a violent and chaotic country with an ineffective government. Obviously, such a nation cannot support the reserve currency. The basis of a reserve currency is military and economic power.
There are now serious doubts about the stability of the United States, the ability of the U.S. government, and the capabilities of the U.S. military. The chaotic U.S. evacuation from Afghanistan showed a complete failure of U.S. intelligence and military planning. Consequently, some foreign observers fear a sudden collapse of U.S. military power, similar to the implosion of the British Empire in the 1940s.
Another development raising doubts about American power is the failure of U.S. sanctions to stop the Russian invasion of Ukraine. The Center for Research on Energy and Clean Air estimates that Russian energy export revenues rose to a record high of $97 billion during the first 100 days of the Ukraine War. The failure of sanctions exposes the limits of American economic power.
Are Central Bankers Seeking to Replace the U.S. Dollar?
The central bankers behind the Renminbi Liquidity Arrangement are not seeking to replace the U.S. dollar as the world’s reserve currency.
Instead, the central bankers want something to take the dollar’s place if it collapses. The fear behind the arrangement is that a catastrophic event will destroy faith in the dollar. That event could be civil unrest or political violence in the United States, political collapse, or a U.S. military failure.
The bankers want an alternative reserve currency ready to go if the dollar fails. To that end, they are building an infrastructure to support the yuan as a reserve currency through the BIS.
The Renminbi Liquidity Agreement shows fears that the U.S. dollar could collapse are realistic and reasonable. The Central Bankers and the officials at the BIS are intelligent people who understand a dollar alternative is necessary.
Investors need to learn the same lesson and start exploring dollar alternatives such as gold.
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