There is a unique symmetry between the United States Federal Reserve and the People’s Bank of China in that each has well over $3 trillion in assets on its balance sheet. But the similarities end at that point.

The Federal Reserve acquired about $3 trillion in assets by expanding its balance sheet with the goal to recapitalize the global financial system. In contrast, the trillions in assets held by the People’s Bank of China are from export earnings and trade surpluses registering in the tens of billions each month. Based on that difference, the People’s Bank of China is in a stronger position to expand the global role of its currency, the Yuan (or Renminbi).

With that in mind, it should come as little surprise that China has been gradually increasing the role of the Yuan as a reserve and settlement currency. Recently, the People’s Bank of China and the Bank of England signed a three-year currency swap agreement in the amount of $33 billion (about 300 billion Yuan). Around the same time, Federal Reserve Chairman Ben Bernanke announced that quantitative easing measures of $85 billion a month in Treasury Bonds and mortgage-backed securities being added to its balance sheet would be ending.

Now, British banks already hold about 35 billion in Yuan deposits. The new currency-swap agreement will for allow the central banks of China and England to swap the fiat money of each and allow for trade to be settled in the sovereign units. At present, US Dollars have to be used in the role of an intermediary form of exchange as China's Yuan is not fully convertible to other currencies.

Great Britain is endeavoring to establish London, already the world's largest currency trading hub, the premier centre for trading the Yuan outside of mainland China and Hong Kong. Towards this end, China has been gradually expanding the value of its currency and increasing its flows of capital. Its recent difficulty in selling government debt shows much more is needed by Beijing in deepening its domestic capital markets. For international exchanges, there is already a swap agreement with Brazil worth $30 billion, in addition to others with trading partners such as Japan, Australia and Hong Kong.

For quite some time, Europe has been trying to coax the Chinese into a greater participation in their economic affairs, especially in financing solutions for the debt crisis. With the new currency agreement with Great Britain, it appears as if China is moving in as the United States is pulling back. And based on the comments from Federal Reserve Quantitative Easing III will be ending in its present form, sooner rather than later.

Long story short, this means there will be more Yuan floating around the globe at a time when there will less US Dollars being produced.

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