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China aiming for 'de-Americanized world’ with renminbi replacing dollar

Section: Daily Dispatches

By Andrew Critchlow
The Telegraph, London
Sunday, October 20, 2013

Given the scale of China's consumption of fossil fuels and raw materials, it is only a matter of time before the renminbi replaces the dollar as the primary currency for trading commodities and resources.

China has overtaken the United States as the world's largest oil importer and goods-trading nation. Over the next five years, it will surpass the rest of the world combined in its consumption of base metals.

Given the scale of the country's consumption of fossil fuels and raw materials, it is only a matter of time before the renminbi replaces the dollar as the primary currency for trading commodities and resources such as crude oil and iron ore.

The debt ceiling farce in Washington and China's growing reluctance to continue underwriting the US economy by buying up its bonds and adding to America's near $17 trillion (L10.5 trillion) debt mountain suggests that this tectonic shift in the global trade system could be just around the corner.

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Chinese state media are already calling for a "de-Americanised world." Some experts say that China is plotting to usurp the greenback's place in global commodities trade. Beijing's strategy hinges on quietly encouraging traders to bypass New York through the creation of a network of interlinked commodity markets based in the global financial hubs of Hong Kong and London.

"There can be little doubt from these actions that China is preparing herself for the demise of the dollar, at least as the world's reserve currency," writes Alastair Macleod, head of research at GoldMoney. A further signal that policymakers are beginning to warm to the renminbi playing a greater role in the global economy came last week when Chancellor George Osborne unveiled a historic deal to allow British investors direct access to China's markets and allow Chinese banks to expand operations in the UK.

The historic pact will also place the City, already the centre for global metals and foreign exchange trading, at the forefront of the race to capture more business denominated in the yuan.

In the world's major mining hubs such as Australia, resource companies are already taking advantage of new legislation that allows invoicing and trade settlement directly in renminbi, a process which completely cuts the US dollar out of the equation.

HSBC predicts that the Chinese currency will be the third-largest unit used for trade by 2015 and fully convertible within the next five years as the People’s Bank of China gradually liberalises policy.

"The flow of transactions conducted in RMB [renminbi] will only continue to grow," said Frederic Vilsboe, head of commodity and structures trade finance for Europe, Middle East and Africa at HSBC in London.

Among the Organisation of Petroleum Exporting Countries, which controls a third of the world's supply of crude, members such as Iran -- constrained by sanctions -- are already agitating for a shift away from pricing in US dollars. China's oil imports set a record last month, with official figures showing that 6.47 million barrels a day of crude flowed into the country.

The scale of China's existing and forecast demand for resources almost makes any attempt by the US to maintain the dollar's status as the world's primary trading currency for resources entirely nugatory. Wood Mackenzie estimates that China will account for 52 percent of base metals demand by 2017, compared with 46 percent of the 96-million-tonne global market this year.

The Edinburgh-based company forecasts that the world's second-largest economy, will be consuming more base metals than the rest of the world combined by 2017 as the process of urbanisation that started at the beginning of the last decade continues. Of course, there are risks, not least China's ability to sustain the rapid rates of growth achieved since the country opened its economy after joining the World Trade Organization in 2001.

Politically too Beijing faces suspicion on the world stage but, if authorities in Beijing can continue to grow the economy, it is almost inevitable that traders will soon be quoting commodity prices in yuan, not dollars.

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