Swiss Banks Hop On Yuan Bandwagon

by Bill White

 

Switzerland’s National Bank and the People’s Bank of China have reached an agreement to swap their respective currencies, meaning the trade between Swiss banking customers and China will no longer have to be mediated by banking systems depending on the Federal Reserve or European Central Bank (ECB).

This agreement is that latest of nearly two dozen which China has made with central banks, including he ECB, the Bank of England, and the Australian Central Bank, which allow for trade between the nations to use China’s currency, the yuan.

Before the agreements, someone with large amounts of national; currency, like the Swiss franc, would have to route transactions through a bank in a third-party nation, or the People’s Bank of China itself, to obtain Yuan, or to exchange yuan for heir national currency. Now Swiss companies can exchange up to 150 billion yuan (21 billion Swiss francs) through the Swiss banking system.

These agreements by China are part of a strategy to limit American world influence and help present an alternative to the U.S.-led Bretton Woods system. Before 2009, when China began this push, most currency transactions went through the Federal Reserve, with the International Monetary Fund providing loans to support national currencies. Among other things this meant the U.S., could isolate nations by denying them access to the Federal Reserve system to clear international transactions, a tactic recently used against Iran.

Under China’s new regime, countries could continue trade the China, and theoretically with nations in China’s exchange network, even if access to the U.S. banking system was terminated.

This news comes a week after China, Russia, Brazil, India and South Africa announced the launch of a new development bank and currency reserve designed to provide small nations with an alternative to the World Bank/IMF system. China has pledged to Venezuela this week $40 billion in loans and economic aid to shore up the Venezuelan economy, loans Venezuela is repaying with 100,000 barrels of oil worth about $9.3 million on the international market a day.

In the past, the United States has been able to starve small nations like Venezuela or Argentina of dollars, and cause substantial harm to their economies. Such nations have had to import heavily dollar-denominated  contracts and have also, in the case of Argentina, exported dollars as interest payments on their bonds. Their domestic economies’ dollar-dependence has thus driven down exchange rates. A yuan alternative for such nations, back by a steady supply of yuan from China, would transfer nations’ economic dependence from the U.S. to China.

Nations are only financially independent when they print their own currency, giving it value by accepting it for taxes and demanding its acceptance by foreigners. The alternative, which exists in most nations and the U.S., has a federal bank print currency only to fund loans, giving it value by accepting it as interest. The former system is debt free because the nation spends money into existence. The latter creates a never-ending debt cycle because money only comes into existence when it is lent. When too many debts come due, the system collapses—which is why never-ending inflation, which planners hope will expand the money supply faster than payment is demanding, characterizes modern economies.