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Page added on June 2, 2017
China’s Next Step To Destroy The Dollar?
China is currently modifying the terms of its oil trade with Saudi Arabia. Specifically, China is working on a deal to pay for Saudi oil using Chinese yuan. This effort poses a direct threat to the security of the dollar.
If this China-Saudi deal happens — yuan for oil — it’s another step closer to the grave for the petrodollar, which has dominated global finance since 1974. You can revisit Jim Rickards article about the Assault on the Dollar, here.
To recap, the petrodollar is weakening because the dollar is losing power as the world’s reserve currency. This is similar to the way pounds sterling gradually fell out of favor during the decline of the British Empire. The decline may take a long time, but what we’re seeing today is another step in the death march of the dollar.
I’ll tell you how to protect your wealth in dollars after I explain this shift.
Since 1974, Saudi has accepted payment for almost all of its oil exports — to all countries — in dollars. This is due to an agreement between Saudi and the U.S., dating back to the days of President Nixon.
Beginning about 15 years ago, China ceased being self-sufficient in oil, and began buying Saudi oil. As per all Saudi customers, China had to pay in dollars. Even today, China still pays for Saudi oil in U.S. dollars and not yuan, which perturbs China’s leaders.
Since 2010, China’s total oil imports have nearly doubled. According to Bloomberg News, China has surpassed the U.S. as the world’s largest oil importing nation. Here’s a chart, showing the trend.
As China imports more and more oil, the idea of paying for that oil in yuan instead of dollars becomes more critical. China does not want to use dollars to buy oil. So, China is beginning to squeeze Saudi over the form of currency in which their oil trade is conducted. China is doing this by steadily lowering its oil purchases from Saudi.
Presently, China’s three top oil suppliers are Russia, Saudi and the West African nation of Angola. Backing-up these three key suppliers are a combination of sources in Iran, Iraq and Oman, which help to diversify China’s oil-supply chain.
In the past few years, China has shifted oil purchases away from Saudi, and Russia’s oil exports have risen from 5% to 15% of the Chinese total.
China imports more oil from Russia, Iran, Iraq and Oman; less from Saudi.
Saudi’s share of Chinese imports has dropped from over 25% in 2008, to under 15% now. Meanwhile, Saudi competitors Russia, Iran, Iraq and Oman are selling more oil to China.
Saudi would like to reverse this declining trend of oil-trade with China. However, these kind of major oil flows don’t just happen in a vacuum.
There’s a good reason why Russian oil sales to China are increasing. As you’ll see in Nomi’s article, trade and financial services are often closely linked. Over the past few years, China has deepened its trading roots with Russia — now, China pays for Russian oil in yuan. Russia, in turn, uses yuan to buy goods from China.
Beyond trade in goods, within the past six months Russia has set up a branch of the Bank of Russia in Beijing. From there, Russia can use its Chinese yuan to buy gold on the Shanghai Exchange. In a sense, Chinese-Russian oil trade is now backed-up by a “gold standard.”
Looking ahead, Saudi Arabia will find itself more and more locked-out of the Chinese oil market if it won’t sell oil for yuan. But to do this, the Saudis must move away from U.S. dollars— and from petrodollars — if Saudi wants to maintain and increase access to China’s oil market.
We’ll know more about the likelihood of this after Donald Trump’s tour of the Middle East.
If Saudi begins accepting yuan for oil, all bets are off on the petrodollar. Yuan-for-oil will entirely change the monetary dynamics of global energy flows. I expect the U.S. dollar to weaken severely when that news breaks.
Much of this oil-for-yuan news is public information. Yet, for some strange reason, there’s a form of blindness within western policymaking and media circles concerning the implications of yuan-for-oil. The idea is so “off-the-wall” that many policy leaders simply ignore it.
Ignore away. But we could wake up one morning in the midst of a massive currency crisis, in which dollar values are falling and oil prices in dollars are soaring.
Jim and I strongly recommend a 10% allocation of your investable portfolio to precious metal.
Regards,
Byron King
for The Daily Reckoning
21 Comments on "China’s Next Step To Destroy The Dollar?"
Hello on Fri, 2nd Jun 2017 7:11 am
Once the US$ ceases to be the world reserve currency, the US can finally start to become an export power house again instead of the dump for chinese plastic.
But due to the lack of a viable alternative to the US$, that will still take a long time. (And no, makati, the philippine peso is not a viable alternative.)
Davy on Fri, 2nd Jun 2017 7:24 am
Why, buy, and what? Gold. From who Jim and I. If you can’t see through that you are a dumbass.
makati1 on Fri, 2nd Jun 2017 7:55 am
Hello, no, but the IMF ‘currency’ is and will be, unless Russia and China go to gold backed money. We shall see. Then the USD will fade into obscurity.
As for trade … do you think that “plastic junk” is all the U$ imports from China?
“The top import categories in 2016 were: electrical machinery ($129 billion), machinery ($97 billion), furniture and bedding ($29 billion), toys and sports equipment ($24 billion), and footwear ($15 billion).
U.S. imports of agricultural products from China totaled $4.3 billion in 2016, our 3rd largest supplier of agricultural imports. Leading categories include: processed fruit & vegetables ($1.1 billion), fruit & vegetable juices ($328 million), snack foods ($213 million), fresh vegetables ($205 million), and tea, incl herb ($152 million).
U.S. imports of services from China were an estimated $16.1 billion in 2016, 6.6% ($993 million) more than 2015, and 58.8% greater than 2006 levels. It was up roughly 350% from 2001 (pre-WTO accession). Leading services imports from China to the U.S., in 2015, were in the transport, travel, and research and development sectors.”
I don’t see much Chinese “plastic junk” in that list, do you?
makati1 on Fri, 2nd Jun 2017 7:56 am
BTW: Ref. https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
Davy on Fri, 2nd Jun 2017 8:09 am
$200 billion of Chinese junk the US does not need per your list. We don’t need there agriculture imports. Many of them are contaminated anyway and a health hazard.
China can’t manage its currency properly now so forget the future as THE world reserve currency.
Russia is too small to do anything significant
IMF won’t get shit done without consensus and there is none.
There you go makati there is reality.
bobinget on Fri, 2nd Jun 2017 9:01 am
Have we already forgot KSA’s 10 year hundred Billion arms deal? (with the US)
China want to increase trade with KSA. One reason for the yuan trades. Nothing sinister. Oil will still be DENOMINATED in USD’s as is that gold the authors urge you to buy.
China made huge gains to become the world’s
leading currency when DJT, after consulting FOX news presenter, pulled the US out of climate agreement.
Nevertheless, unless this country falls into a civil war, USD’s by force of numbers will be the world’s reserve currency for decades.
rockman on Fri, 2nd Jun 2017 10:57 am
Though it has been selling US bond holding (along with those of other countries) still owns about $1 TRILLION in US$ denominated paper. It also receives around $20 BILLION in interest on those bonds. In the first 4 months China received 148 BILLION US dollars for its exports to our country.
So China sees a net benefit of decreasing the value of the 1 TRILLION US dollars it OWNS and the approximate 470 BILLION in US. dollars it will receive in the next 12 months.
Interesting plan.
Davy on Fri, 2nd Jun 2017 6:34 pm
Bobieget/Makati are you up on this? Pretty heavy stuff bro!
“Reuters Goes To China, Discovers “Ghost Collateral”
http://tinyurl.com/yd4yrb25
“Back in 2014, a scandal erupted when media reports confirmed what many had previously speculated about China’s banking system: namely that much of China’s staggering loan issuance had been built (literally) upon air and that billions (or trillions) in loan collateral had been “rehypothecated” between two, three or many more debtors – or never even existed – forcing banks to accept that they would never recover much if any of the pledged collateral – in most cases various commodities – if the economy were to suffer a hard-landing resulting in mass defaults.”
“Recently Fitch Ratings estimated non-performing loans in China’s financial system could be as high as 15 percent to 21%, or trillions of dollars. This in a banking sector that has undergone a massive credit expansion. The value of outstanding bank loans ballooned to $17.2 trillion at the end of April from $5.8 trillion at the end of 2009. The total size of China’s financial system is roughly $35 trillion, more than double the size of the US. In September last year, the Bank for International Settlements warned that excessive credit growth in China meant there was a growing risk of a banking crisis in the next three years. In a report last September, Fitch Ratings estimated that it would cost as much as $2.1 trillion to clean up China’s bad debt – almost a fifth of annual Chinese economic output. According to our estimates, the number was substantially higher: nearly $8 trillion. By comparison, during the global financial crisis, the direct cost of rescuing U.S. banks was about eight percent of gross domestic product.”
“Four years ago we called China’s collateral fraud “a Bronze Swan.” As Reuters has discovered, contrary to conventional opinion, nothing has been fixed and the problem remains however it has been deftly swept under the rug of trillions in new debt as China’s ponzi scheme continues to grow. And yet, if and when the day comes that the Chinese debt creation machinery grinds to a halt, or – worse – goes into reverse, that’s when all the abovementioned problem, which we contend are the weakest link in China’s financial system, will re-emerge, prompting the world’s most furious scramble to recover collateral first. It will also be the catalyst that finally tips China’s financial system, which for years now has been in the ponzi finance phase, over into the inevitable, and terminal, “Minsky moment.”
makati1 on Fri, 2nd Jun 2017 7:34 pm
Reuters? Don’t make me laugh! A major arm of the U$ MSM Iron Curtain Propaganda Department.
And how is “Ghost Collateral” any different than printed (faux) dollars? In the real world, they are the same. Both are worthless. Only held up as ‘value’ by ‘belief’ as Americans are soon going to find out. BTW: This is not new news. I read about it long ago.
If China goes down, so goes the rest of the world. I’m ready. Are YOU? LMAO
makati1 on Fri, 2nd Jun 2017 8:06 pm
BTW: Reuters is run by a Jew, (Stephen J. Adler) who is also on the Council of Foreign Relations and a ‘One Worlder’. That it is based in the UK makes no difference. The UK is a lap dog of the U$ these days.
Midnight Oil on Fri, 2nd Jun 2017 9:36 pm
ONE thing for certain… Before the Dollar tanks…real tanks will roll in a World War…
That is for certain….this ain’t going down without a fight!
makati1 on Fri, 2nd Jun 2017 9:54 pm
MO, it could happen over night. No tanks, just crash. Besides, the next big war will never need tanks. Missiles will do it all in a few hours. The U$ will not be protected by oceans that mean nothing to ICBMs.
deadlykillerbeaz on Sat, 3rd Jun 2017 7:29 am
The 2018 US defense department’s fiscal year budget is $639,100,000,000.
https://www.defense.gov/News/News-Releases/News-Release-View/Article/1190216/dod-releases-fiscal-year-2018-budget-proposal/
And in 2017, the defense budget was $582,700,000,000.
https://www.defense.gov/News/News-Releases/News-Release-View/Article/652687/department-of-defense-dod-releases-fiscal-year-2017-presidents-budget-proposal/
Money says the dollar will remain the world’s reserve currency.
Doesn’t matter if the debt is 20 trillion.
Deficits don’t matter.
DerHundistlos on Sat, 3rd Jun 2017 4:38 pm
Midnight Oil, you are indeed correct. The US will not go quietly into the night. Perhaps the trillions in military expenditures is a form of insurance preventing something like this from occurring. Couple military expenditures with the rabid anger of Trump’s 40% of the US population, the result is a recipe for disaster.
Davy on Sat, 3rd Jun 2017 4:45 pm
“Couple military expenditures with the rabid anger of Trump’s 40% of the US population, the result is a recipe for disaster.”
“Rabid anger” is on the left der hund. Who has been violently demonstrating? Who has been holding up severed heads? You are turning into a left winger dinger.
makati1 on Sat, 3rd Jun 2017 6:20 pm
The “Right” are the angry serfs who elected Trump. THAT act is one of desperation and anger, not love. TPTB need something really big (world war) to distract them from the collapse of everything Americans believe and hold dear. That means China (low possibility) or Russia (high possibility) or both (likely) will be the target of some ‘false flag’ event in the near future. Time is getting short. It’s now or never. The U$ cannot hold together much longer.
Or, they may settle for Civil War II. We shall see. Interesting, Yes? ^_^
Davy on Sat, 3rd Jun 2017 6:22 pm
Spare me the drama Makati
makati1 on Sat, 3rd Jun 2017 6:35 pm
Reality is not your thing is it Davy? LMAO
Davy on Sat, 3rd Jun 2017 7:10 pm
Not pretend reality like you have been repeating for four years now.
makati1 on Sat, 3rd Jun 2017 7:19 pm
You have just verified my statement as fact. LMAO
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