Source: Voice of Russia

President Xi Jinping’s visit to Germany yielded an unexpected success for the Chinese quest to internationalize the yuan.

German Bundesbank announced that it had signed a memorandum of understanding to create a clearing and settlement center for yuan payments in Frankfurt, giving China even more influence on the European trade. Reporters from Businesweek, citing sources from the European financial sector, believe that there were several European competing for the privilege of becoming the European center for yuan-denominated trading.

Angela Merkel convinced the Chinese decision-makers to chose Frankfurt over Paris and Luxembourg. Most probable, the choice was influenced by the fact that Germany is the biggest trade partner of China in Europe with a yearly turnover of more than 140 billion euros. It is obvious that it was only a matter of time until Beijing will try to switch all the trade flows between the European Union and China from US dollars to Chinese yuan. Creating a clearing and settlement center operated by the strongest financial institution of Germany, the Deustche Bundesbank, is a prerequisite for the switch and the memorandum of understanding signed with the People’s Bank of China is the confirmation that all the requirements for getting rid of the dollar in EU-China trade have been met.

Joachim Nagel, a member of the Bundesbank’s executive board told Bloomberg that “Yuan clearing will strengthen the close economic and financial ties between Germany and the People’s Republic of China.” Such actions are an obvious attack on the dollar’s status of the world’s base currency for global trade and in the context of Merkel’s statement regarding the creation of a “strategic partnership” with China it may be speculated that in the near future in the EU dollars will only be used for buying imports from the US.

In Europe there still is a huge segment of companies that use dollar financing but this is likely to change. After Daimler’s successful “panda bond” issue that allowed the German manufacturer of the famous Mercedes brand to borrow 500 million yuan, it is very likely that other European companies will follow suit and will attempt to tap into the Chinese credit markets that are starved for high-quality borrowers.

The Chinese currency has a bright future in Europe, while the dollar’s influence in the Old World is fading fast.