China's secret win over Australia

China’s secret win over Australia

The US dollar could be a thing of the past in global trade as Australia’s iron ore industry embraces this new payment method.

A ship carrying Australian iron ore docked in China’s Shandong province last week. As Australia’s largest buyer, that’s not unusual. What was remarkable was how this iron had been paid for.

The transaction was in Chinese yuan. Not US dollars.

Beijing controlled GlobalTimes saw it as a small – but significant – victory.

“Australian firms understand that they can’t always play by their own rules in business partnerships with Chinese customers, their largest global buyer, and using the Chinese yuan for trade is a positive change,” the East’s director of Australian studies was quoted as saying China Normal University, Chen Hong as I said.

Beijing continues its efforts to bring its currency, the yuan, onto the world stage as a major trading currency. But it has made no progress since it was listed as an international reserve investment by the International Monetary Fund in 2016.

Their use to pay for the BHP iron ore carrier Vittoria’s freight two weeks after leaving Port Hedland in Western Australia may represent more the economics and politics of the moment than any long-term trend.

“The Russians are forcing European countries to pay for their gas in rubles. Australia has taken a good step by offering China an alternative to US dollar payments for iron ore,” said Macquarie University economist Dr. Lurion DeMello.

“Better to offer than to be forced.”

market forces

Despite rising tensions, trade with China accounted for 29 per cent of Australia’s total imports and exports in 2020. It rose to a record level in 2021.

That makes China three times as valuable as Australia’s second largest market – the United States.

And it’s not the first time mining giant BHP has accepted payments in yuan.

In May 2020, it delivered a shipment of Brazilian iron ore to China’s Baowu Steel Group – the world’s largest steelmaker.

“The fear of China sourcing alternative iron ore supplies from Brazil and Peru is a real threat,” said Dr. De Melo.

“BHP’s move with Eisenerz is certainly a good one.”

It wasn’t alone either. At the same time, Baowu said it has struck similar deals with iron ore companies Vale of Brazil and Australia’s Rio Tinto and Fortescue Metals Group.

“Australia’s iron ore is the best in the world and China will depend on it for many decades,” he said.

“The US dollar has dominated global commodity trading for far too long. We need alternative currencies for trade.”

It’s the economy, fool

“The launch of yuan-based iron ore trading is an important step for the Australian company to get closer to the Chinese market while offsetting the potential risks and uncertainties posed by the US dollar triggered by high US inflation” , like that GlobalTimesspecified.

The US Dollar is a freely floating currency. That means its value will be determined by the performance of the US economy, comparable global interest rates, and other market forces.

The Chinese yuan is pegged. The central government in Beijing has arbitrarily fixed its value at around one-seventh the US dollar to make its exports more attractive.

In bullish conditions, the US dollar looks very attractive.

In a bear market – with rising inflation and rising interest rates – pegged currencies look more stable.

“With global inflation already underway, all currencies have depreciated against the US dollar,” said Dr. De Mello.

“The dollar should continue to rise as interest rates rise. The latest inflation data in the US supports this.”

This makes the US dollar more expensive for countries – and multinational corporations – as a currency of exchange.

“The high US dollar is having a profound impact on countries that import many minerals such as iron ore,” added Dr. Added De Mello.

A matter of value

Beijing has made no secret of its desire to topple the US dollar with the yuan as the world’s reserve currency – the currency of choice in international trade.

Last month it brought together Brazil, Russia, India and South Africa – the BRICS group – to plan just such a new global currency based on the pooling of their funds.

Beijing also said it hopes to build a global yuan reserve with Hong Kong and Singapore to facilitate its availability for large international transactions.

But the artificial pegging of many of these currencies remains a serious obstacle. And the yuan is not freely convertible into other currencies: the Chinese Communist Party is unwilling to cede control of its value to market forces.

The US dollar, on the other hand, is freely convertible. This, coupled with its attachment to a robust economy and long stable history, has led to its embeddedness in global capital markets.

But its appeal has slowly waned in recent decades.

And the yuan has so far failed to capitalize on it. Just a quarter of the shift has gone towards Beijing, which now holds about 2.9 percent of the world’s cash reserves.

International central banks have instead chosen to diversify their options through non-traditional reserve currencies such as the Australian dollar, South Korean won and Swedish krona.

The European euro is the second largest currency in the world – well behind the dollar.

The US Federal Reserve is unconcerned about the immediate future.

“No currency replicates the properties of the US dollar as a store of value, unit of account and medium of exchange,” according to a recent Federal Reserve report.

“Additionally, US assets are considered safe and liquid and have withstood the impact of global shocks.”

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