Yuan Enlists Canada to Challenge World Domination of U.S. Dollar

Hostesses in cocktail dresses and blasts of confetti flanked Chinese and Canadian financial luminaries as they celebrated the yuan’s first beachhead in North America.

The event, held in a cavernous room bathed in red light at the Metro Toronto Convention Centre last week, served to introduce a transaction clearing bank for the Chinese currency less than 500 miles from Wall Street. The new trading hub will allow companies for the first time to settle accounts with Chinese partners during local business hours in the $5.3 trillion dollar-a-day currency market.

China now has an outpost in America’s backyard to challenge the U.S. dollar’s dominance in global finance, enlisting Canada in its campaign to help put the yuan among the ranks of the world’s reserve currencies. Canada plans to profit on that ambition by facilitating yuan use beyond its own borders, across the continent.

“There is a natural conflict between the U.S. dollar and the Chinese yuan,” said William Zhu, chief executive officer of Industrial and Commercial Bank of China Ltd.’s Canadian unit, the newly named clearing bank. “We should start in Canada.”

Reserve Currency

The International Monetary Fund will decide later this year whether the yuan should join the U.S. dollar, euro, yen and British pound in its basket of currencies backing its special drawing rights, the asset it offers to supplement nations’ official foreign-exchange reserves.

U.S. Treasury Secretary Jacob J. Lew said in a speech Tuesday that China needs to loosen its financial controls before the yuan can qualify to be included in the IMF basket.

Inclusion would mean prestige, and an immediate boost in demand for the currency. The last time the yuan was up for consideration, in 2010, it was rejected because the IMF said the tightly controlled currency was not “freely usable.”

Canada’s clearing bank could help there. It’s the latest of 10 appointed in the last year by the People’s Bank of China, which has established outposts from London to Sydney to boost yuan use abroad.

The Canadian bank comes with an explicit mandate to serve the U.S., where yuan use has been growing faster than in either the U.K. or Singapore, according to data compiled by Standard Chartered Plc.

ICBC’s Zhu told Canadian lawmakers in February that Canada’s viability as a yuan center depends on winning flows south of the border.

Greenback Replacement

“Firstly, we can serve our Canadian clients, then next step our neighbors, including the U.S., Mexico, even the countries in South America,” Zhu said in a March 13 interview at Bloomberg’s Toronto office. “This is actually a replacement of the U.S. dollar, so I would like to say it is a conflict between the yuan and the U.S. dollar, so it is hard for the United States to fully support that kind of issue.”

On a trip to China the day before the clearing-bank event, IMF Managing Director Christine Lagarde said the currency “clearly belongs” in the SDR basket. China has advocated for the distinction as part of its broader foreign-policy push for a “multi-polar” world in which the U.S. is just one player, rather than the dominant one.

The dollar’s status as the No. 1 reserve currency is unquestioned. The latest data show it’s used to settle 44 percent of global trade and makes up 63 percent of central bank holdings, according to Society for Worldwide Financial Telecommunications and IMF data.

Exorbitant Privilege

That position lowers borrowing costs and allows the U.S. to fund imports simply by printing money rather than having to build up foreign-exchange reserves first through exports.

“The U.S. benefits enormously from the exorbitant privilege,” said Chas Freeman, a retired U.S. ambassador who served as former President Richard Nixon’s main Chinese translator when the two countries began normalizing relations in the 1970s.

The U.S. doesn’t have a yuan clearing bank officially sanctioned by the Chinese authorities. While the U.S. dollar has long been convertible to the yuan, without a clearing bank, payments to partners in mainland China can’t be settled there.

If the U.S. government were to work with the Chinese to set up a yuan trading hub of its own, it would “in effect be hastening the day when this dollar hegemony would come to an end,” Freeman said.

Continental Gateway

The currency markets have borne that out.

In 2009, Chinese central bank Governor Zhou Xiaochuan called for using IMF special drawing rights as a reserve alternative. When then-U.S. Treasury Secretary Timothy Geithner said the U.S. was open to the idea two days later, the dollar slid as much as 1.3 percent against the euro within 10 minutes. It bounced back up when Geithner predicted no change in the U.S. currency’s role.

The yuan, which floats against the greenback, only accounts for about 1.8 percent of trade settlement globally and recent data have shown its expansion slowing.

It fell to seventh place in the list of most-used currencies in the global payment system in February, down from fifth in January, according to Swift. A March survey by HSBC Holdings Plc showed about 17 percent of those questioned were using the yuan, also known as the renminbi, to settle transactions, down from 22 percent a year earlier.

At the Toronto event, top industry officials, executives and ministers told hundreds of Chinese and Canadian business people, financiers and currency traders that the clearing bank put growth within reach. That expansion could make Canada the continent’s gateway to the world’s second-largest economy.

“A rapid build up of expertise in renminbi liquidity could have significant benefits,” Joe Oliver, the country’s finance minister, said, the bright red logo of China’s largest bank towering behind him. “Today’s launch of a renminbi trading hub provides Canada with a first-mover advantage.”

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