China and Japan have taken the first step in abandoning the dollar. I have been waiting for this for years. Now it has happened.
Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said over the holiday weekend.
Here is why this is important.
China is Japan’s biggest trading partner with $340 billion in two-way transactions last year. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as global, financial markets remain volatile and decaying. It marks a major leap forward of the internationalization of the Chinese currency, a step that has been developing for the last few years, from tiny beginnings. It signals that the Chinese banking system has developed to the stage where they can handle international transactions of note. The development of the banking system is clearly far advanced, so expect the enlargement of the international Yuan market to pause, as this leap in size settles in and any teething problems eliminated.
As time passes the process of the internationalization of the Yuan will primarily be at the expense of the dollar. At some point in this process, the rise of the Yuan and the fall of the dollar from its throne will become visible on foreign exchanges and in the financial picture inside the U.S.A. and Europe. At best, we’ll see the Yuan join the world’s current leading currencies in global trade, but rising in the future to potentially the prime global, reserve currency at worst.
But this process could take more than five years or less if the Chinese government pushes it hard.