DONG AND THE PAN-ASIAN FX TRADING CENTER

DONG AND THE PAN-ASIAN FX TRADING CENTER

And How the RMB and VND are Already Directly Convertible

There has been much discussion over the last few days of how the Chinese yuan and the Singapore dollar are now directly convertible.  The action is of course another move towards the full convertibility and internationalization of the renminbi. 

 As we have previously discussed, along with the emerging multilateral financial system where the SDR will replace the US dollar as the reserve asset, expanding liquidity by way of SDR bonds, there will also need to be a new exchange rate regime.

We have been seeing bits and pieces of this new regime emerge over the last year and there has been much discussion around the outside borders of such an exchange. 
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 Eventually as the US dollar is removed from its status as the world’s primary reserve currency we will see other currencies and commodities look for another peg. 

It is likely that commodities will become priced in SDR’s and currencies, at least initially, will peg to the currencies of the larger trading partners.

This means that some currencies will continue to be pegged to the US dollar while other currencies will peg elsewhere.

The recent announcement of the direct convertibility between the renminbi and the Singapore dollar is very telling of what process is unfolding.  From the article on The BRICS Post website we have the following quotes:

“Previously, the exchange rate between the two currencies was calculated based on the yuan-US dollar central parity rate and the Singapore dollar-US dollar rate.”

And:

“The direct yuan-Singapore dollar trade is good for forming a direct exchange rate between the two currencies and reducing exchange costs,” the PBOC said in a statement on its website.”

This clearly distinguishes both the desire and plan to implement new exchange rate regimes which exist outside of the US dollar system.  We have long stated in many posts here ourselves that the Vietnamese dong will likely depeg from the US dollar and peg to the Chinese renminbi,

In the post The Dongs Revaluation Is Imminent we reviewed how the Vietnamese Working Group MAG has recommended changes to the dongs exchange rate structure to protect the currency from “shocks in the foreign exchange markets”, a clear reference to the unraveling of the US dollar.

From that post we quote the following:

“MAG’s experts commented that it is unreasonable for Vietnam to follow a dollar-pegged foreign exchange policy, while its trade and foreign debts depend on other foreign currencies.”

And:

“Therefore, Vietnam has been recommended to apply a new foreign exchange policy which allows it to valuate the Vietnam dong in correlation with more than one foreign currency.

This will be a reasonable choice which helps both stabilize the exchange rates and ensure the flexibility of the nation’s policies.”

Early in the year Vietnam had banned all FX trading from its shores.  This would include trading in the US dollar.  In response China opened the Pan-Asian FX Trading Center on its border with Vietnam. 

 The timing of both events are not a coincidence and were likely planned to facilitate a regional move away from the US dollar.

The Pan-Asian FX Trading Center allows for the direct trading of the Chinese renminbi and the Vietnamese dong.  This test market was started in April and continues today.  The US dollar is not used as the intermediary.  More on this can be read here.

This direct convertibility between the renminbi and dong was implemented before the announcement yesterday of the convertibility between the renminbi and Singapore dollar. 

 It was not widely known or announced by the western media outlets for the simple reason that it is a test market and secondly, there is a larger process unfolding here, a process which is not to be openly announced to the western masses.

Asian news sources are more open about the process but the information is not always translatable. In the article titled “ASEAN currency foreign exchange transactions will be automatically processed in the ABC”, we learn the following:

“Agricultural Bank of China Guangxi Branch of the 27th presentation of the ASEAN currencies listed RMB exchange rate is missing for a long time, is not conducive to economic and trade exchanges between China and ASEAN,

the Agricultural Bank of China in the future will actively explore inter-regional banks VND traded business to offer the role of market makers to participate in inter-bank transactions ASEAN currency,

and the existing foreign exchange trading system upgrade, to achieve the ASEAN foreign exchange currency trading system automatically processes.”

As stated above, the language barrier does not always make for clear translations, but we can discern what the article is stating.  The Agricultural Bank of China will be building platforms of inter-regional bank trading between the renminbi and the dong. 

 It also stated that there will be “upgrades” to the foreign exchange trading system of the ASEAN currencies.

Continuing from the article:

“…the first banking center in Guangxi and Yunnan provinces zone established in the border line, China (Dongxing test area) ASEAN currency business center, the first time a direct quotation of RMB against VND deal, which is for the yuan against the Vietnamese Dong pricing, and promote the process of internationalization of RMB has played a major significance.”

This quote is referencing the direct trading between the renminbi and dong discussed in the Pan-Asian FX Trading article. It is clear that a new exchange rate regime, or pricing structure, is being tested, just as the MAG Working Group had recommended.

From the same article we also learn that a broader regional direct convertibility process is also being set up for the following currencies:

Malaysian ringgit, Philippine peso, Thai baht, Lao kip, Myanmar kyat, and Cambodian riel.

This direct convertibility will be allowed by the Association of Southeast Asian Nations, or ASEAN, and it’s Currency Business Center.

Near the end of the article it also states that last year Syria did foreign exchange transactions, including forwards, swaps, and options, with the renminbi amounting to 1.8 billion RMB.

So much of what is happening is kept out of the western media and even alternative media sources do not pick up on the complexity and systemic transition which is building just underneath  the surface of the old. 

We (see) signs of the process on the surface of our news sources, but cannot construct the full puzzle because so many of the pieces are missing.

At some point the full transition will become apparent and the new exchange rate regime will be unfolded.  How that will look and what the exchange rates will be cannot be determined at this time.  What can be stated with certainty is that a change is coming to the FX markets.  And likely soon.  – JC

http://philosophyofmetrics.com/2014/10/28/dong-and-the-pan-asian-fx-trading-center/