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China tiptoes to petrodollar recycling

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. 
The swap deal with the UAE has introduced a tantalizing thought to the GCC states — possibility of renminbi invoicing — that will worry the west. Currently, there may be no need to lose, sleep since Beijing severely restricts the flows of its currency across its borders but China is doubtless putting the infrastructure in place for an era that is not too far off when it may begin to do away with today’s strict limits on currency flows, and Beijing may well seek the use of renminbi in international trade. By 2025, China may be importing three times more oil from the GCC than Uncle Sam would need to buy.

Posted in Politics.

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3 Responses

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  1. rockytorque says

    debt is here to stay for a long time and not only for usa but for other countries too.but usa is taking many steps towards patching the leaks in its ship thus slowing down its decline.china and india are going in opposite direction.their economies chugging along post 2008 due to fiscal stimulus given by their govt. are now slowing down.india does not have any monetary flexibility left due to high inflation.china is seeing a slowdown of its major export markets whose effects it has avoided till now due to govt. spending spree.

  2. Jame Phifer says

    Get real, or did you just happen to forget about the $4 Trillion Dollar unfunded Iraq-a-pack-of-lies-War, and the still soaring costs of the Afghanistan debacle maybe somewhere far north of $1.5 Trillion Dollars, again unfunded, or the the Wall Street crime scene where $13 Trillion Dollars of the country’s economy were criminally redirected to private accounts. Yes there’s more, for instance the ticking time bomb of the Social Security, Medicare entitlement program slated to be about %20 of the economy by 2015, one of the key elements of the reason why we will never again create the high tax revenue flow to overcome this incredible debt cycle were in is, you got one guess, that’s right when you ship about 40,000,000 manufacturing jobs out of the country that paid between $15 to $30 dollars an hour was like a slow bleeding of the jugular vein, doesn’t hurt so much at first but over time it will begin to have serious repercussions. Yes you created other jobs for the service economy that pays between $8 and $12 dollars an hour, so now you have more blood flowing out than you put in to replace it and the gap is widening. A lot of pressure with China on a World Tour to unseat the Dollar as the worlds reserve currency, the list is growing rapidly and in a few months you will see a Stampeding herd fleeing the dollar, after all who wants to be left with worthless currency, in some of these country’s the rulers will end up like Ghadaffi, like Saudi Arabia who holds the third largest amount of dollar debt, the rest of the debt other than China and Japan is being held by the European Consortium and Britain, and we know how swimmingly well the Euro is doing and Britain’s GDP to Debt Ratio is at around 250%. The Era’s of starting wars to stimulate the economy is over, you can only do that when all other factors about the economy are stable, but when they are out of kilter like the U.S. economy now and the wars gain you little or no access to the resources you want to exploit to run your economy, you end up with nothing to pay for the wars and every time you have wars like that, you just start a new cycle of a thousand razor cuts to the economy. Can we say Bastille Day part 2, this time not with pitch forks but with guns and heavy weapons and war veterans from the Iraq and Afghanistan wars.If you liked escape from New York with Kurt Russel you’ll love it when it’s orchestrated by the Four Horseman.

  3. rockytorque says

    an excellent article sir.united states is taking many steps to prevent dollar from being dethroned eg. fiscal deficit reduction.us economy seems to be in much better shape compared to 2 yrs ago.they are winding down their war machinery.trade deficit has decreased.china and india however may face a slowdown.

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