How does China get the currency to pay for oil?
Noone will exchange the currency, right. Nobody wants the RMB, enough to pay for a few million barrels of oil, rght? So China has to sell goods to the Eurozone or the US, right? Is that why Chinese goods are cheap in the West? And what happens if people simply aren’t buying? They have to sell their goods to us at an even cheaper rate?
A related question - still now, but more so in the days which have ended only recently when all oil was bought and sold exclusively in the USD, would the same have applied to Europe? France, for example, bought oil - noone wanted all those Francs, did they? The commission would have been huge to exchange them anyway, no? So France exported to anyone who would pay in dollars? But now they can pay in Euros in some places, right?
Another related question - now that people aren’t trading exclusively in dollars, what does this mean for the dollar?
SDD - sorry, just to double check, I am 'very misinformed' or just 'misinformed'?
only joking
So your saying that China does buy oil in RMB - who from?
Thanks
Justin - thanks for that. So how does China get the dollars? By exporting goods? Is that the only way that she can? And now that Iran, Venezuela and, a very slim possibility, perhaps OPEC as a whole now accept non-US currencies, what does that mean for the $??
sorry when I wrote that last edit I meant that there's a slim possibility that more countries will follow Iran and Venezuela in accepting non US denominations. My grammar was all wrong.
December 31st, 2008 at 4:47 am
You are very misinformed. There is a very active market for the RMB.
December 31st, 2008 at 4:47 am
On the global market, all business is done in dollars because as of the Bretton Woods Agreement in 1944, the dollar is the world reserve currency. So when doing buisiness countries don't want any other currency besides the dollar. And the reason why Chinese products are cheap relates to the purchasing power of the currency you're using to buy the product with. So buying goods with the Dollar or the Euro from China would reduce the price according to the exchange rate.
- Edited -
Perhaps I should collaborate on the term "World Reserve Currency" because apparently my integrity is being tried by a Top Contributor of Woman Gender study and I wouldn't want that after having your thanks.
It would be navie to think that whenever foreign business men gather to exchange they use phyisical dollars or a separate bank account pertaining only to dollars and I'm sorry if my text book friendly answer described an affair of so.
The real importance of being the anchor currency is actually that that all products on the global market are peg to the dollar. True that I've heard of people trading with bullion, and it isn't unusual for France to do business in Euros, but I, like everyone else in the world, have never invested or exchanged in an asset that didn't have its value first detrimine by the dollar.
In short, you can buy whatever object you like with whatever currency you like, but the value of the good and currency
comes from how much it's worth in dollars. That's the reality.
December 31st, 2008 at 4:47 am
Justin is sort of right, though his answer is more of a clean, text-book answer rather than a reflection of reality.
While the USD is the world reserve currency, it has never been the universal currency of international trade, and progressively less so in recent years, as you note. Euros and often preferred by some nations, the Pound Sterling and Swiss Franc have always help a niche market, and many people trade using bullion, as this is more stable and private.
In the long term this will lead to a progression away from the USD as the preferred currency of trade, just as the Pound Sterling was relegated from the major to minor player status. This is due to many things, not least the violent fluctuations in the USD in recent years, political reasons, and lack of faith in the dollar as a secure currency. The USD is not likely to become irrelevant any time soon, if ever, but there will be a move away from it as dominant. There was never any ongoing promise or requirement at Bretton Woods that the USD's position as the world reserve currency was going to be forever.
As for China getting USD, it holds vast amounts, both as currency banknotes and electronically as debts held over US interests. China also buys vast amounts of foreign currency and trades forex regularly as part of it's economic activity, as do all governments. China simply has the ability, by itself, to heavily influence the currencies of several nations and trading blocs to the point where it can alter it's price on the market to ahuge degree. Remember that this ability essentially puts the value of the USD in the hands of non-Americans, something that was always going to be an issue with a world reserve currency scenario.