Killing the Petroyuan

“Yuan” isn’t actually the name of the Chinese currency; it is formally called the Renminbi (人民币), or “People’s Currency.” “Yuan” is what is called a’counting word’ in Chinese: things that can come in various quantities have different words to specify what unit is under discussion  instead of “give me a beer,” you must ask for a glass of beer or a bottle of beer  “Yuan” is a quantity of Renminbi; but it’s so commonly used that yuan functions as if it were the name of the money.

Anyway, the Treasury Secretary has a plan.

A swap line is not a loan and it is not a bailout. It is a contractually-bounded currency exchange in which a foreign central bank delivers a deposit of its own currency to Treasury or the Federal Reserve and receives an equivalent dollar deposit, with both parties committing to reverse the trade at a specified future date and at the same exchange rate. The foreign central bank pays interest on the dollar borrowing. The US holds the foreign currency as collateral for the duration. Counterparty risk sits at the central-bank level, not the commercial-bank level. 

The structure is so conservative that the Federal Reserve's swap operations, including peak utilization of roughly $585 billion during the 2008 crisis and $450 billion during the 2020 crisis, have generated no documented losses to US taxpayers across the major episodes examined in the academic finance literature. As Bessent told Congress in defending the Argentina arrangement, "in most bailouts you don't make money. The US government made money." What Bessent is now doing is taking that demonstrated playbook and scaling it into the central instrument of 21st-century American economic statecraft. The strategic logic, which Bessent has stated plainly, runs as follows. Additional swap lines, in his words, "can benefit our nation by reinforcing dollar usage and liquidity internationally, maintaining smooth functioning in dollar funding markets, promoting trade and investment with the United States, and, in hypothetical stress scenarios, preventing disorderly sales of US assets." He went further and named the actual game: "Dollar dominance and reserve currency status are strengthened by constant long-term initiatives, including countering the growth of problematic, alternative payment systems." Translation for those who do not speak Treasury, this is about killing the petroyuan in its cradle.