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Last month I received a lot of emails from readers regarding articles on a new currency relationship between Australia and China allowing direct convertibility of Australian dollars into Yuan.
In what may mark the beginning of a historic shift, Australia appears ready to bypass the U.S. dollar as the world’s reserve currency and allow for the direct convertibility of the Australian dollar into the Chinese yuan.
"Reserve currency" is the term used to describe a currency that many governments hold significant amounts of in foreign exchange reserves.
By directly converting its currency into Chinese currency, Australia’s businesses will be able to cut costs and the inconvenience of changing foreign-currency earnings into dollars, thereby encouraging and accelerating even more business with China.
Year of the Yuan?
Two days ago RT had a similar story Year of the yuan: China's explosive currency goes global.
The Reserve Bank of Australia announced in April it will transfer 5 percent of its foreign currency reserves ($2.1 billion) into Chinese bonds, deepening ties with its Pacific neighbor and biggest trade partner, and reflecting a global shift to the yuan.
The move is an "important milestone in deepening our financial and economic linkages with China," Australia’s Treasurer Wayne Swan said in an emailed statement to Bloomberg.
China and Australia are major trading partners, so an investment in Chinese currency reserves will benefit transactions between the two countries. Now, they can conduct business transactions directly from yuan to Australian dollar, cutting out the middle man, the US dollar or euro.
Is this a significant announcement? No, not really. For starters, China's forex currency reserves are worth about $3.4 trillion. Are we are supposed to believe another $1-2 billion is significant?
End of US "Free Lunch"?
Is this the end of the US reserve currency free lunch? No, not really. People do not understand the reserve currency is more of a curse than a blessing. The US would love nothing more than China and Japan to stop buying treasuries. If they did, the Yuan and Yen would rise, and that is precisely what the Fed and Congress wants.
Function of Math
Third, and as I have explained on numerous occasions, currency reserves and trade patterns are a function of math.
For example, the US runs a trade deficit and Japan and China accumulate US dollar assets (typically US treasuries) as a result.
Australia Balance of Trade
Consider this balance of trade chart for Australia.
In spite of a commodities slowdown (see Australia Manufacturing Collapses as Commodity Supercycle Stalls), Australia has an increasing trade surplus with China.
It is only logical for Australia to want to conduct business in Yuan and hold extra reserves in Yuan.
Australia is dumping US dollars. And everyone one else will too. So the story goes.
Really? No not really. These stories are hype from hyperinflationists and US dollar bears who do not understand simple trade math. Yet they get repeated over, and over, and over, and every time I receive a number of emails on it.
Will more trade be conducted in additional currencies? Yes, that is happening. Is this the beginning of end of the US dollar as world's reserve currency? Not a chance.
The Yuan is not convertible, China does not have huge highly liquid bond markets, the US has the largest economy on the planet, and no other country wants the curse that comes with having the world's reserve currency.
For further discussion, please see …
Originally posted at Mish's Global Economic Trend Analysis
© Mike "Mish" Shedlock
Investment Advisor Representative