China and Argentina in currency swap

 According to a recent ]]>Financial Times]]> article, China has agreed a Rmb70bn ($10.24bn, £7.18bn, €7.76bn) currency swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American country.

For those of you asking what’s in it for me, let me tell you the little story of the Sterling Pound. Not so long ago, right until the end of WWII, the Sterling Pound ruled the word, as did the British Empire. Countries in Asia, Africa, and Latin America would exchange their goods, make payments and received payments in British Pounds. It was the golden age of the British Empire, another empire were the sun would never set.

Yet, as it always happen, some other guys wanted a piece of the big pie the ]]>Albion]]> had. Among those countries were a young industrial power, which financed the U.K. so they could keep buying their ever-expanding goods, and Germany, which aspired to cover the space of the U.K by force. By the end of the XIX Century both the power of the financial system of the US, and the military might of Germany were in full force. By 1914, Germany tried to assert political dominance by means of force over Europe and the US financed her natural allies (those who owe her the most money).

The war to end all wars came and went without solving the underlying problems: The UK was losing financial power but held military power, the US needed the UK as a exporting ground as it built her industrial base, and Germany hated it because it felt it had the real power to take over Europe and the colonies. Fast forward to 1939, and the same tragedy repeats as an even more horrible tragedy. However, this time, as Europe lays in ruins, the US replaces the UK as the financial center of the world with the creation of the International Monetary Fund, the World Bank and the Bretton Woods system. In effect, the mighty Dollar, which just 80 years before had not been worth its weight on paper, became the international exchange currency.

If you follow my analogy so far, and you supplant UK by US, Germany by Russia and US by China, you will see that there are not a lot of differences between our situation today in the US and the situation of the UK at the beginning of the XX Century.  The current advance of China in direct financing of their commercial operations in Renminbi is both a challenge and a warning the United States. As the prices of goods are expressed and paid for in US Dollars, the country has a take on every single international transaction in the world. If the current greatest industrial power, China, decides to bypass the Dollars as a mean of exchange, the value of the currency will fall as its relevance to international commerce fades.