Circle September on your calendar. That’s when the world you know might change forever. And not in a good way.
September is when China plans to roll out the China International Payment System (CIPS). The new system will make it easier to process international payment transfers in China’s currency, the yuan (or renminbi).
As a result, the yuan will officially become a global trading currency. But the real goal here is brutally simple: China wants to dethrone the U.S. dollar as the world’s international reserve currency.
It won’t happen right away. This is just one of a series of gates China is opening... unleashing forces that will become an irresistible flood of change.
Right now, the system to process cross-border payments in yuan is clunky. But the CIPS will use the same coding system as the other big international payments system, SWIFT. That’s short for the Society of Worldwide Interbank Financial Telecommunications.
(Don’t let your eyes glaze over at the acronyms. I promise to limit those as much as possible. You’ll want to pay attention, though. This may be the most important story you read this week.)
SWIFT is based in Brussels, but 44.6% of the payments that go through it are in U.S. dollars. So, it’s really the platform that makes the mighty greenback the world’s reserve currency.
The Chinese hate the dollar’s supremacy. They want their place in the sun. And they’re finding a lot of allies who are upset with Uncle Sam...
Allies like Russia.
America’s License to Print Money Is About to Be Revoked
The U.S. and European nations were recently putting pressure on SWIFT to kick Russia out of the international payment system. This was to punish Russia for its recent land grab/border war with Ukraine.
Well, that was then. You know what SWIFT just did? It gave Russia a seat on its board - a VERY exclusive club. This move is a slap in the face to the U.S.
So why is SWIFT bending over backward to accommodate Russia? I think it’s terrified of the competition that is represented by China’s new CIPS system. It doesn’t want Russia doing all its business in CIPS.
But it may be too late. In fact, there is a lot going wrong in America’s currency empire lately. And a lot of it can be traced back to China.
Americans don’t realize what an advantage we have thanks to the dollar being the world’s reserve currency. We can basically print money. Washington never has to balance its checkbook (at least, not yet). Other countries must stockpile Smaug-hoards of dollars just so they can pay for things on the international market.
One of those countries is China. And it’s had enough.
China has $1.24 trillion in forex reserves. It piles up that wealth due to its imbalance of trade with the U.S. And to maintain that status quo, China must continue buying dollars (and U.S. Treasurys) to prop up the spendthrift Americans and their currency.
So why would China risk a $1.2 trillion investment by dethroning the dollar? I’ll give you that answer in a minute.
First, let’s look at some more facts...
Global Yuan Use Is Taking Off
As I said, China isn’t the only one fed up with U.S. dollar hegemony. The Bank of Russia and People’s Bank of China have already inked numerous agreements to trade completely outside the U.S. dollar.
China is signing treaty after treaty with other countries around the globe to clear trade deals in yuan.
Use of the currency is already soaring. The yuan became one of the world's top five payment currencies in November, overtaking the Canadian dollar and the Australian dollar.
In 2014, yuan payments jumped by 102%. They increased by 20.3% in December alone.
China is pushing for the International Monetary Fund (IMF) to endorse the yuan as a global reserve currency alongside the dollar and euro.
Yi Gang, vice governor of the People’s Bank of China, told reporters that the country is “actively communicating” with the IMF on the possibility of including the yuan in the basket of the Special Drawing Rights (SDRs).
Forces Are Lining Up to Lever China’s Influence
China isn’t just pumping up its currency. It is rolling out aid programs and even a development bank to rival and undercut the influence of the World Bank, a U.S.-led institution.
To date, China has pledged...
-- $40 billion for the Silk Road infrastructure fund, which seeks to revive the trade routes that once connected China to the Mediterranean. (I wrote about China’s Silk Road investments in India here.)
-- $10 billion for the New Development Bank - also known as the BRICS Bank - which is co-founded with Brazil, Russia, India and South Africa.
-- $41 billion for a related BRICS Bank currency contingency fund.
-- $16.3 billion for domestic infrastructure routes that will pump business through neighboring countries.
-- $50 billion to launch the Asian Infrastructure Investment Bank (AIIB). The AIIB is meant to seed investment in Asia - in transportation, energy, telecommunications and other infrastructure.
The AIIB is the jewel in China’s economic development crown. So far, 36 countries have signed on as founding members, mostly from Asia and the Middle East. China expects to contribute 50% of the AIIB’s funds going forward.
But, humiliatingly for the U.S., Britain joined the AIIB even when our government asked them not to. Germany, France, Switzerland and Italy also ignored U.S. pleas and jumped the fence.
The AIIB will wield plenty of influence. A whopping 4.5 billion people (62% of the world’s population) live in Asia. And many of them live in absolute squalor. More than 600 million Asians have no access to electricity, while 1.8 billion Asians have no access to clean cooking facilities.
Still... why is China taking this risk? It is the world’s biggest investor in U.S. Treasurys. Why upset the applecart?
I’ll tell you why: because China has to.
Why Take the Risk? They Must!
Money is fleeing China by hook or by crook. The country needs it to stay if it wants to have a bright future.
China tops the world in many things. But one thing it’s probably not proud of is its position as the No. 1 exporter of illicit funds. More than $1.25 trillion drained out of the country between 2003 and 2012, according to a report from Global Financial Integrity.
More than 18,000 Chinese citizens are “economic fugitives.” And there are more and more every day.
This is why property markets continue to inflate in parts of Canada, California, New York City and Washington, D.C., among other places. Foreign investment in U.S. property nearly doubled to $22 billion between March 2013 and March 2014.
Chinese cash accounts for nearly a quarter of the money foreign buyers spent on U.S. real estate last year.
Meanwhile, Chinese entrepreneurs have become quite innovative in finding ways to get money out of the country. They have a shell company overbill by two or three times for goods shipped to the mainland. Or they bill for millions of dollars of services that are never performed.
Of course, the old-fashioned methods still work as well. Wealthy Chinese stuff suitcases with cash, jewelry and gold and take extended “vacations” with no intention of going back.
The fact is, nobody wants to keep their money in a country that is still controlled by a communist party - not if they have a choice. Heck, China jailed and/or condemned 749 disgraced officials last year, many for lining their pockets.
Do you think other corrupt officials might be getting itchy feet?
China has asked the U.S. for help in getting its fugitives back. The last time the U.S. cooperated on a Chinese extradition was 11 years ago. Fat chance, Beijing!
Once Chinese expatriates get their money out, they have little to no intention of bringing it back.
This is a big problem for China. And it gets worse every day.
With Frenemies like These...
Meanwhile, Russia and other countries on our “frenemies” list have to watch the U.S. wield the mighty U.S. dollar like a bludgeon.
By the way, that list just happens to include the oil sheiks of OPEC.
Friendships forged in oil and mutual interest are unraveling. (In fact, my latest research has confirmed that a Saudi-led coalition is currently working on a plan that could devastate our economy... U.S. stocks... and especially the dollar. For that story, click here.)
The point is, if there were a way to make Uncle Sam stumble - AND improve their own international standing - you know many countries would do it. And why stop there? Heck, they’d probably like to kneecap the ol’ SOB, that’s what they’d like to do...
Which brings us back to China’s new international payments system. This, along with the other power plays the country is making in the high-stakes game of global influence, is setting the mighty dollar up for a tremendous fall.
China will start using CIPS in September or October. If that goes well, the full rollout starts early next year.
Now ask yourself...
All those countries that stockpile dollars for international trade... what if they don’t need so many dollars anymore? What will they do then?
We might see dollars dumped like there’s no tomorrow.
The dollar’s global dominion is coming to an end. It’s time to stop hoping it won’t happen and instead start preparing for it.
I think precious metals are a good hedge against economic upheaval. Likewise, companies that can convert a commodity - like oil, for example - into exportable cash flow could do well.
This article originally appeared on InvestmentU.com: China’s New Plan to Dethrone the Dollar (And Why It’s Working)