The dollar is losing reserve currency status before your eyes. When the Euro crisis resolves one way or another, a tsunami will hit the dollar.
The currency swap agreement between China and the United Arab Emirates [UAE] signed during Premier Wen Jiabao’s tour of the Persian Gulf region ending today, will raise eyebrows in the western capitals, especially London and Washington. The list of countries with which China has such deals is slowly and steadily lengthening and this is the first such deal with a Gulf Cooperation Council [GCC] state.
The deal with the UAE is worth $5.5 billion — bilateral trade was $36 billion last year with Chinese exports accounting for two-thirds — and aims at “strengthening bilateral financial cooperation, promoting trade and investments and jointly safeguarding regional financial stability”, according to the Chinese central bank. China is, in essence, providing ’seed money’ so that businessmen wouldn’t need to convert every transaction into dollars, thereby lowering the foreign exchange costs.
The cool reasoning here is practical convenience but its shadows inevitably fall on other domains. Clearly, the Middle East is being ’sensitized’ about the renminbi’s role. To be kept as reserve currency in the UAE vaults enhances renminbi’s prestige. For the UAE, keeping the mighty yuan is one of the safest thing they ever did in the world of high finance, as the appreciation of the Chinese currency in value is a near-certain happening in the future.
Beyond all that, the swap deal calls attention to China’s rapidly-growing economic links with the GCC region. It is a political statement of intent by China to boost ties with the UAE, which has been a ‘pocket borough’ of Britain, historically, in the Middle East. From the dhows, they are calling, ‘Yo, ho, Chinese are coming!’
But they are coming with a strong purpose, too. Abu Dhabi holds 7% of world’s proven oil reserves, oil price is crossing $100 per barrel and UAE will be renewing its oil concessions through fresh tendering in 2014 and this time around, Chinese companies are sure to give Royal Dutch Shell, ExxonMobil and Total a run for their money. Of course, the UAE is a tough market where the western business culture is well-entrenched, but then, never underestimate the Chinese.
Over and above, China is tiptoeing into the dazzling world of petrodollar recycling and it is difficult to conjecture that Beijing is unaware what it could be doing via this swap deal with the UAE — for an ancient country that knows only too well that any long journey must begin with a small step.
The heart of the matter is that the GCC currencies are pegged to the greenback and their massive earnings are largely ploughed into the bank vaults in London or New York or are used to acquire assets such as US equities and Treasury bonds — that is, when they are not spent on arms deals and other extravagant spendings.