Stay Ahead of This (Massive) Currency Shift

Email
    Text size
Author Image for Peter Krauth

China's political and economic presence surges daily. Lockstep with that surge is the growing significance of its currency.

Along with China's emergence as the world's second-largest economy, its yuan recently displaced the euro and became the second-most used currency for international trade.

Chinese leaders are intent on internationalizing their currency by growing its acceptance, perhaps even challenging the U.S. dollar as the new reserve currency, a trend I've highlighted here before.

To reach that goal, new yuan trading centers are being established.

But the location of the next major trading hub is almost certainly not where you'd expect.

And the implications will redefine the power centers of global commerce...

North America's Newest Currency

China's central bank has pledged the yuan would become "basically convertible" by 2015. So as the currency "frees up," potential settlement centers are eyeing profits from converting currencies into and out of the yuan.

In an effort to gain first-mover advantage, major cities are rushing to become the next trading hub.

Right now, no city in the Americas has yet to emerge as an important settlement center.

But two major Canadian cities are jockeying for just such a coveted position.

According to a recent article in The Globe and Mail, "Leaders in banking, government and economic development in Toronto and Vancouver are pushing to make their cities hubs for settlement of the Renminbi [or RMB, also known as the yuan] in hopes of establishing a centre for trade in the currency."

High-level talks between the financial services industry and the department of finance have been ongoing for months, but efforts have recently been stepped up.

Neil Tait, who was a banking executive in China and is currently vice-chair of the Canada China Business Council, believes there will be a huge "first mover advantage" as there is still no such center in the Americas.

Why would Toronto's Bay Street win out over say, New York's Wall Street?

A lot of reasons. Some obvious, some perhaps more subtle.

New York and Toronto may share the same time zone, but the United States is clearly a much bigger trading partner for China.

Still, Canada's relationship with China is a less complex one, in both politics and business.

Thanks to its natural resources, Canada's a coveted supplier of many of the raw materials and energy that China needs... badly.

Last year China National Offshore Oil Corp. (CNOOC) acquired Nexen Inc. of Calgary. It was the largest purchase ever in a market economy. And since then, no other country has received more Chinese investment than Canada.

By contrast, CNOOC's 2005 bid for U.S.-based UNOCAL failed, while striking a nerve over the politically sensitive energy sector. China's done oil and gas deals with the U.S. since then, but none has come close to the size of the Nexen deal. In the past six years, China spent about $30 billion on Canadian oil and natural gas assets alone.

At 900 million barrels of oil annually, Canada is by far the largest oil exporter to the United States. But success with the fracking boom has the United States becoming increasingly oil and gas self-sufficient.

Though I expect the Keystone XL pipeline will eventually be approved, it's still not a slam dunk. And energy is a big part of Canada's economy. So Canadian leaders have been giving serious consideration to other potential customers.

Prime Minister Stephen Harper has stated that it's a priority for Canada to grow its exports of energy towards Asia, all the while reducing its reliance on the United States as a market.

But it's not just about Keystone.

British Columbia's provincial government has set its sights on building a world-class LNG (liquefied natural gas) export industry. According to Premier Christy Clark, that industry would boost her province's economy and create as many as 100,000 jobs over a 30-year span.

Clearly, the stakes are high, as there's a lot to be gained.

Companies across the Americas, from Chile to Alaska, would use the new trading hub to convert their currency directly into RMB (and vice versa), saving them the additional costs of exchanging into the USD first - a necessary evil as most commodities are priced and sold in U.S. dollars... for now.

Despite the benefits, establishing a yuan trading center is a complex undertaking.

Direct government involvement will be required to help institute a direct currency swap line between the Canadian and Chinese central banks. Such lines are crucial, as they not only provide sufficient liquidity for trade, but also for emergency situations like the 2008 financial crisis.

But none of this is new to either side. Canada has currency swap lines in place with the United States, Europe, Britain, and Japan.

Hong Kong, Taipei, and Singapore already benefit from yuan swap lines. And this past June, London acquired theirs. Then in October, the European Central Bank did as well. At this juncture, setting one up in the Americas just seems like a natural progression.

Two Canadian Rivals Are Vying for the Yuan

If the next yuan trading hub lands in Canada, it's more than likely to end up in either Vancouver or Toronto... or maybe even both.

First, Toronto. It's the undisputed financial nerve center of Canada. And according to Moody's Investors Service, Canada has the safest banks in the world.

The Toronto Financial Services Alliances (a grouping of Canada's largest banks, insurers, and pension funds) have already had high-level meetings with government representatives and the Bank of Canada, hoping to gain favor for Toronto as the next yuan hub.

Canada is home to 1.5 million inhabitants of Chinese ancestry, representing 4% of the population. Of those, 40% live in Toronto. Many skilled workers, able to speak Mandarin, are a boon to the city.

By contrast, nearly 17% of Greater Vancouver's 2.5 million residents are ethnic Chinese. Vancouver's other advantages come from its location on the Pacific Coast and its proximity to Asia. What's more, it's home to large volumes of trade finance and a special program exempting foreign exchange trading from provincial taxes.

This past November, the government of British Columbia even took an innovative step, launching the first ever AAA-rated, foreign government-issued, RMB-denominated bond, worth almost $425 million.

But it's entirely possible that both Vancouver and Toronto become hubs to trade the renminbi, with even better service, thanks in part to covering two distinct time zones.

Stay Here for the Earliest Action Plan

I've already told you that China plans to one day, at least partially, back the yuan with gold. But that could still be several years in the future.

Before then, this Asian behemoth wants to boost its currency's acceptance globally by "floating the yuan," and moving it towards full convertibility.

Since most commodities are priced in U.S. dollars, those purchases require the buyer to first convert funds into greenbacks, and sellers to accept them. All this creates artificial demand for the U.S. dollar.

But this too is changing.

The Chinese already have at least 25 swap agreements in place, totaling more than $1 trillion, a fact I've highlighted here before.

As investors, it's important to spot trends before they emerge. Canada's odds of landing the next yuan trading hub are high, and it's not by accident.

Canadian energy and raw materials producers have ardent buyers for their goods in the East. The Chinese are chief among them. The world will continue to renew and build out its infrastructure and continuously modernize. That's not about to change.

Having a settlement hub in Canada will facilitate trade and lower costs for buyers and sellers. And providing the necessary raw materials will benefit resource companies and their shareholders.

Today I wanted to let you in on this emerging story: The Yuan is coming to Canada.

Although it's too early in the race to call the winning city, you're already ahead of the game on this global shift.

And rest assured, Money Morning readers will be the first to know how to adjust their portfolios and harvest the profits when it happens.

About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but, as editor of Real Asset Returns, he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

... Read full bio