Deutsche Bank becomes first foreign yuan clearing bank in Europe

One consequence of the transition to renewable energy and electrified transport, is that oil imports will start to decline. And the dollar is of course the currency of choice for that.

The US economy and other countries that export fossil fuels will feel the impact over the next decade or so. The energy transition might go a lot quicker than people seem to expect. Currently about 20% of global car sales is electric. In some countries it's well over 50%. China of course being one of them. And they are making rapid progress with electrifying freight as well. This is already impacting their fossil fuel imports. They still import a lot.

One effect that I think people underestimate is that while it will take a long time for all the ICE vehicles to disappear, the new ones do most of the driving. So, new EVs have a relatively large impact on fuel consumption and imports pretty early on. E.g. Chinese diesel imports apparently already are being impacted by their rapid deployment of tens of thousands of electrical trucks. Soon hundreds of thousands. That's already a third of the market in China and will probably head for well over 50% in a few short years. The EU is not that far behind.

The ripple effect that's going to have on oil trading, refinery capacity, etc. is going to be substantial. Of course current geopolitics is speeding things up massively. LNG and oil scarcity is causing a lot of issues globally and countries are accelerating moves to reduce their dependence on that.

The yuan will never become a reserve currency as long as China maintain tight currency controls around importing and exporting it. It's very difficult to (legally) send CNY out or China.

The euro is in a much better position to be adopted as an alternative, but its share of global reserves has been flat at around 20% for years.

https://data.imf.org/en/news/imf%20data%20brief%20march%2027

This whole house of card is very modern, there was no such thing as "Reserve currency" not even the British pound, it was the most traded currency. but holding a currency's (debt) as a foreign reserve instead of gold is very recent phenomena, even central banks reserves or their function is also rather modern phenomena.

while Yuan usage in trade will reduce the US influence, the amount of assets held in dollar nominated investments is so so much bigger, and this will very slowly change if it will at all.

If you are trying to apply lessons from the gold standard era to lessons in the current era of non-convertible fiat currencies, then you are going to draw the exact opposite of the correct conclusions. There is a fundamental difference in how global capital flows work when the world uses specie flows versus when the world does not.

Here is one hint. The reason why currencies like the Spanish dollar or Dutch guilder became standards were primarily questions of prestige and minting quality as you held those currencies in your own possession. But everyone could recognize a guilder and so when dealing with a foreigner, it was easier to have them.

In that type of environment, being a global export power meant that you were a global gold issuer because you sold your goods to the rest of the world, got their gold (or silver), melted it down, and issued your own stamped gold or silver coins, that circulated all over the world.

If that is your mental model of foreign trade today, then please read a bit further in your history books, because we live in the world of non-convertible fiat money. This means that when China sells $100 of stuff to America, it doesn't get to take that money home, the money is kept in an American bank account, with the name of that chinese seller as the beneficiary of the account. It's a non-convertible currency. A dollar is always a dollar, China can't melt it down and convert it to a Yuan.

So now, to be the reserve currency doesn't mean that your specialized minting tech is being stored in central banks all over the world, it means that central banks all over the world have deposit accounts in your banking system. And that can only happen by being the world's largest importer, the exact opposite of the situation in the age of the Dutch trading empire. Your entire analysis is backwards.

I think this has the causality reversed. The dollar is the world's reserve currency because the US wields incredible negotiating power and has been the de facto military hegemony in the past few decades.

It seems likely that the dominance the US has enjoyed in the recent past will diminish somewhat as other blocks with larger population bases catch up on the technology and industrialization fronts, and eventually start flexing their industrial might to create peer-level militaries.

USD exorbitant privilege is mostly just exorbitant now that sanction evasion solved problem due to US going ham. Central banks pulling out of treasuries, rates increase selling to institutional vs marginal buyers, USD just terminal debt serving sink hole now. Ironically PRC can now lend out USD from their reserves and trade surplus at better rates than FED... the answer to USD in meantime for PRC is PRC USD, every dollar PRC recycles their USD is a dollar not buying treasuries that makes USD reserve more onerous to maintain.

LBH PRC not dumb enough to dig itself into Triffin deindustrialization hole US has. IMO Yuan positioning itself to be better than a reserve currency, it'll be premium currency for PRC tech stack (everything do be primogem) once PRC overtake west in critical strategic goods - ultimately, whoever controls discounted society sustaining tech / commodities stack long term controls payment preference. In meantime, PRC more than fine USD continue it's decline into debt serviced casino where somehow now house net loses until US inevitably have to debase/inflate away leaving others holding bag. There's really no alternative scenario (i.e. default) for USD at this point. Downstream of that is FX re reevaluations etc, i.e. PRC nominal > US nominal is not going to take years, is not dependant on PRC vs US growth, in the end it will take a few months of FX swing outside of either party's controls.

Losing the reserve currency doesn't happen in a vacuum. It happened to the British and Dutch because their empires were dismantled.

So, yeah, it could happen to the US, slowly, over time (it already is). But nobody wakes up tomorrow and says they no longer want USD. Where are you parking the money, yuan?

As other people on this thread will point out the Yuan is not close to replacing the dollar, nor is any other aspect of the Chinese financial system highly competitive, even with the staggering rise of corruption in the US.

But this is yet another indicator of the loss of soft power, which is much farther gone than, I'd say, 90% of Americans realize.

The supposedly smart people in the tech industry should be alarmed by the loss of soft power. A lot of tech revenue comes from overseas, but if US technology is seen to be the tool of an unreliable, belligerent, corrupt, authoritarian government, that revenue will evaporate, and it will happen faster than, for example, fundamental international finance changes. And yet these supposedly smart people have lined up behind our government.

The US is also has very large investment markets that are attractive to investors worldwide. Countries that export to the US can build up large US investments, and not just bonds either. (Flip side of trade deficit.)

It seems hard to say when that would change.

It’s very unlikely that the USD will lose its status particularly to the Yuan. You can do that mental calculation yourself. Would you convert all of your lifesavings from USD to Yuans today or in the next 10 years? The answer is probably “not a chance”. The reason is simple, liquidity and trust. China has no comparable open and independent financial institutions international central banks can trust, nor can they have them without surrendering control over their monetary policy. So as long as there’s no alternative to the USD (BRICS will likely fail), it will continue being the default global currency for reserves, debt and trade.

How come Deutsche Bank, a German bank, is the first bank doing this? And why now? Is it because the less friendly political stance towards Europe from the US side that the tables have turned a bit?

I also wonder how much political backing a bank needs to offer a service with the implications towards the status of an allied currency as reserve currency status - small as it may be for now.

The US wields incredible negotiating power period. In way too many fields.

It worked when the country wanted to be a globalist force and lead by example (albeit it was partially pretending to set an example, US exceptionalism is ingrained in US culture and politics).

It doesn't work in an anti-globalist world, especially one in which allies are bullied.

One advantage America has, and will remain having as an advantage as long as its broken: it borrows a lot of dollars. So if China wants to save a few billion dollars, it is super easy to do it by just bidding for US treasuries, rather than trying to convert it to yuan and somehow putting it in its own economy where it won't cause overheating.

America is essentially just a debtor of last resort, that is the superpower of the dollar.

This is not yet about making the renminbi a full reserve currency. China still imposes exchange controls. There's historical reluctance in China to expose the internal economy to external market forces. And a lot of rich people in China who would like to get more money out. This lack of free convertibility limits the use of the renminbi outside China.

And its going to be incredible to watch how many of our own country will be gleefully cheering this on as if the replacement will be better for them.

The current admin has destroyed much of the government backing. Its to he seen if the global business fail to uphold its value.