Gaining a Wider Distribution for the Renminbi

It’s not a Terrific Tuesday for the currencies and metals this morning… Looks like it’s a completely Risk Off Day, with only renminbi (CNY) and yen (JPY) booking positive numbers versus the dollar, this morning.

Not the way you want to start your Tom Terrific Tuesday, I’m sure, getting that news blasted in your face right out of the starter blocks… But… I have places to go, and people to see this morning, so, no beating around the bush!

Yes… I’m going to attend a briefing by St. Louis Fed President, James Bullard this morning that’s presented by the CFA people… Chris Gaffney is a CFA, so that’s my “in”… I really want to hear what Bullard has to say this morning, and of course I’ll let you know tomorrow morning!

OK… Back to what’s going on this morning. Well… All the euphoria over the new Italian Government isn’t proving to be lasting one iota, as new Italian Prime Minister (PM) Monti, is finding it difficult to have a “full Monti Gov’t”! The euro (EUR) has to deal with that, and… Rising yields in not only Italian debt issues, but now Spanish debt issues. Yes, one would think that rising yields would attract investors, but not when they are being issued by questionable issuers…

This is the same scenario I see for us here in the US eventually… It probably isn’t going to begin today, or tomorrow, but in the next few years, we could see this scenario right here on these shores… No one knows, but the Shadow, when China is going to say “no mas”, but, if China continues to move forward with their plans to gain a wider distribution for the renminbi… It will be here before you know it!

So… If that’s the key, we should probably look into what China is doing to gain a wider distribution of the renminbi… Now… We’ve already discussed how they signed currency swap agreements with several countries/trade partners that removes dollars from the settlement of the trade, and the two countries only exchange their home currency… We’ve already discussed how China has allowed Hong Kong and Singapore banks to offer deposits in the renminbi, and we’ve discussed the issuance of renminbi bonds in Hong Kong… Well, the last item is what we are going to discuss today.

Write this down in a journal, because one day your sons and daughters are going to ask what the turning point was… And here it is… It’s called… Dim Sum Bonds… In Hong Kong, Dim Sum Bonds are renminbi-denominated bonds that have existed since 2007; but China only allowed a couple of banks to issue them… Now all banks can issue them… For instance, McDonald’s Corp. issued 200 million renminbi of debt… And now companies like Caterpillar and Volkswagen are leading over 80 issuers to the table to issue debt in renminbi. Those on the ground in Hong Kong say the total this year could reach 230 billion renminbi ($36 billion worth)… May not sound like a lot, considering the Treasury issues the US comes to market with, as they live from auction to auction, but… Baby steps… You wouldn’t expect China to rush into this, right?

So… China gets to hedge its dollar holdings, they get to gain an even wider distribution of renminbi, and… Now holders outside of China can invest in renminbi… And… China is another step closer to a free floating renminbi! These are not available here in the US, so unless you have an account in Hong Kong, this is not a way you can deal here, yet… But… I tell you this story, to make you aware of what China is doing to remove the dollar as the reserve currency of the world…

In other news… In the Eurozone this morning, third quarter GDP printed a +0.2% increase over the previous period, which saw a much stronger +0.4% increase in France, and a +0.5% increase in Germany… But this news is being offset by yet another fall in German Economic Sentiment, as measured by the think tank ZEW… I think that while the Eurozone as a whole is probably going to suffer a recession, I’m surprised by this report from Germany. I’ve had people that visited Germany in the past six months tell me that the “place is hopping”… But, you see, when the Eurozone peripheral countries’ problems are in the news 24/7, it begins to weigh on you…

And in the South Pacific… The New Zealand dollar/kiwi (NZD) has really fallen on its face overnight… The New Zealand Finance Minister, English, commented that “a lower exchange rate will help export growth and that there are some indications that the currency is heading lower.” Yeah, when people as important in your country as you make comments like that the markets have no problem obliging your wish! I have always blasted Reserve Bank of New Zealand Gov. Bollard, for all his dissing of kiwi… Now I have two guys in New Zealand to deal with… UGH!

And the Reserve Bank of Australia (RBA) printed their minutes from two weeks ago, when they cut rates… The minutes were interesting in that all the comments were balanced… So, if they were balance, why did they cut rates? I think this all points to the Eurozone’s problems… So, even a country as segregated from the Eurozone as Australia is seeing the effects of the Eurozone’s problems…

And so… Back we go to the Eurozone… New Greek PM Papademos was saying all the right things about Greece being a part of the euro this morning. Papademos said, “Our membership of the euro is a guarantee of monetary stability and creates the right conditions for sustainable growth. Our membership of the euro is the only choice.”

Well, then… Mr. Greek PM… You might want to get that new government you formed to line up and begin doling out the medicine, that smells like, and tastes like austerity measures, and haircuts!

I saw that German Chancellor Angela Merkel was walking in the same circles as me, with my call that the only way out of this mess is to issue a Eurozone bond… Merkel said that “deeper political integration was necessary if Europe’s common currency was to be saved. ‘Not less Europe, but more’ was the answer to the sovereign debt crisis facing the euro currency union”

Interesting… Could it be baby steps toward something that needs to be leapt into? Apparently…

And then here’s another reason I still believe that buying gold on the dips is a good idea… The central bank of Russia has purchased 90 metric tons of gold to date, and is on course to buy 100 tons before year-end. The central bank said that it “would aim at buying 100 tons of gold every year to increase the proportion of gold in the country’s reserves as a safeguard against volatility in the financial markets”

Makes sense for them… Makes sense for us!

Then there was this… Former Treasury Secretary Larry Summers — you know, the guy that I told you a couple of weeks ago actually said, “Debt got us in this mess, and debt will get us out of it” — was back in the news, with this latest thought… “The US economy is too strong to enter a long period of high unemployment and slow growth like Japan’s ‘lost decade’ that began in the 1990s.”

Hmmm… Would that be the same economy that has basically not added 1 job in the past decade? Or the same economy that has now had 4 years of high unemployment, with no sign that it will end soon? Don’t be confused by a guy like Summers, folks… He’s just doing his part for the administration that wants to get reelected…

To recap… The market has a bias to buy dollars this morning, as all risk, save the renminbi and yen, is getting sold. The new Italian PM is finding it difficult to form a “full Monti Gov’t” and rising yields on bonds are now being seen in Spain. China has taken another step toward convertibility of the renminbi, with issuance of corporate debt denominated in renminbi that’s sold offshore…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning