Argentina’s Economy Minister Sergio Massa committed to begin paying for Chinese imports using the Chinese Yuan instead of the Dollar. The new arrangement is to relieve the country's diminishing U.S. Dollar reserves. For April, around $1.04 billion of Chinese imports will be paid in Yuan instead of Dollars. Starting in May, the exchange will be around $790 million per month in Yuan instead of Dollars.

A massive drought has plagued South America for a year destroying agricultural exports. Dollars stopped flowing into South America, creating an emergency for South American currency reserves. Dollars left the country to pay for goods but did not return with export transactions. Argentina’s exports decreased by $15 billion due to “the worst drought in the country’s history,” Massa said. “This set a challenging task for us to maintain reserves for keeping the level of import of materials and goods that play a key role for economic activities and production in the country.” He continued by explaining why switching to the Yuan would provide “more freedom” to Argentina and “strengthen its reserves.” 

The new arrangement will allow the import turnaround to function in a 90-day window instead of the current 180. In November, Argentine President Alberto Fernandez said Chinese President Xi personally authorized the Chinese government to extend a $5 billion (35 billion Yuan) swap line of credit to Argentina after the two engaged at the G20 summit. The swap line was to help Argentina stabilize its Peso, which has been falling dramatically against the Dollar since the Federal Reserve began raising interest rates. The credit line also allows Argentina access to Chinese goods without depleting its Dollar reserves. The problem Argentina will experience in the years to come is a growing Chinese trade deficit. The trade deficit in 2022 was $8 billion.  

There is a growing hatred of the Argentine political system. Inflation in Argentina is more than 100%. Argentina's central bank hiked interest rates another 1,000 basis points (10%) to 91% yesterday. There is widespread government corruption and a black market gauging people over 100% of the official Dollar exchange rate. Nearly 1 in 4 people live in destitute poverty, and it is an election year, with most candidates dropping out of the race. It isn't hard to figure out why Argentina embraced the Yuan.

Argentina's $1 billion monthly won't change or destroy the Dollar's international dominance. However, Argentina moving to the Yuan is part of a growing trend. There is a pattern of countries abandoning the Dollar for the Yuan to protect themselves from currency devaluation and sanctions. International use of the Yuan rose 26.6% in 2022. Bloomberg reported yesterday that, for the first time, the Yuan surpassed the Dollar as China's most used cross-border currency. 48% of China's March receipts show payment in Yuan, which was near 0% in 2010. Only 47% of transactions happened in Dollars in March, and 83% in 2010.

According to SWIFT data, the Yuan only accounted for 2.3% of global transactions, but that can't be accurate. The 2.3% is what was traded on the SWIFT. If 48% of Chinese transactions were paid in Yuan and China represents 18.2% of the global economy, where are the other 6.4% of international Yuan transactions hiding? China must conduct large transaction volumes outside the SWIFT to account for the disparity in the numbers.

The problem with trusting the SWIFT data is that there isn't visibility on the Russian alternative to SWIFT, the SPFS. The Russians created the SPFS as an alternative to the SWIFT in 2014 after invading Crimea and being met with unprecedented sanctions through the SWIFT system. After the 2022 invasion of Ukraine, Russia stopped reporting on member banks and countries transacting through the SPFS. Before the data blackout, it was well documented that China, North Korea, Iran, India, and many Asian nations have made deals with the SPFS since 2019. The most recent specifics are not known due to the data blackout, but Reuters reported record growth of the SPFS and more than 440 verified banks in 2022. 

It is unlikely that the Yuan will become the primary reserve currency or de-throne the Dollar any time soon. However, the Yuan will likely continue to take a growing portion of the Dollar's international market share year after year. If the trends continue as it has since 2010, the most likely outcome is a weaker Dollar. A weaker Dollar means less purchasing power. Less purchasing power means higher prices to buy the same goods and services, i.e., inflation. If you agree with that assessment, what will happen to precious metal prices in the next few years?

The writing is on the wall for the Dollar. Avoid the warning at your peril.

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