India-China trade no longer needs dollars

Indian importers no longer need to use dollars to buy goods from China. They can convert Indian currency directly into Chinese currency (the RMB), and then pay for items with RMB. A recent deal between the central/monopoly banks of China and India led to this change.

This will reduce the demand for dollars, and like any other good beholden to supply and demand, this will lower the value of all dollars in existence. How much will this lower the value? Well, I can imagine there’s quite a bit of trade between those two countries.

In this case, the reduction in value of the dollar is honest. People want it less, so the value declines. Whereas when Federal Reserve issues more dollars, those new dollars steal the value of all existing dollars. That is as dishonest as a company issuing more shares and not increasing the holdings of existing shareholders to maintain their ownership percentage.

However, the movement away from dollars is partly or mostly due to Federal Reserve. Since no one can guess how much Federal Reserve will increase or decrease the quantity of dollars, fewer people want to hold dollars.

This change might be more about convenience, then avoiding a depreciating currency, since the RMB loses value just like the dollar, when the Bank of China issues more RMB. If Chinese exporters are really worried about the declining value of currencies, then they’d demand payment in an item with a more stable quantity such as a precious metal or even a non-precious metal.

Read about the change.

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