Chinese Diversification Strategy
by Jim Willie, CB. Editor, Hat Trick Letter | April 23, 2009
In a series of maneuvers, Chinese officials have revealed their strategy implementation in a very broad set of steps. Beijing leaders plan to establish the yuan currency as a global reserve currency. The process will be made more complete after issuance of a large volume of Chinese Govt debt securities, soon in coming. The number of policy actions is impressive. While the USGovt is busy stepping backwards with FASB rules enabling false bank accounting, gearing up Treasury programs to direct colossal elite welfare / confiscation to failed banks responsible for the crisis, covering up Wall Street fraud and regulatory lapses and debt rating agency collusion, and ordering pork like the $9 billion high speed train from Disneyland to Las Vegas, the Chinese are making important meaningful critical strides. Within a year, the Chinese will have established the yuan currency as a legitimate alternative to the USDollar for global trade, and later to some extent for global banking. (more at link)
China is really looking at a lot of other options to get away from the U.S. dollar. The latest report is that it has been building huge gold reserves. There is no doubt that China wants to get out and away from the U.S. dollar now. We have heard SDRs, copper and precious metals all mentioned as plays out of U.S. dollars. How this will play out on currency markets and in the U.S. government bond market is no at all clear.
So, here we are, three weeks out from the G-20 and now we learn the Chinese have been buying gold. In my mind, there is no doubt that China is looking to topple he U.S. dollar as the world’s reserve currency. And this will happen over time. The Europeans want it – they are a rival in currency terms. The Asians want it – they want to stick it to an arrogant country which caused great hardship to Asia through the IMF in the Asian Crisis. And the oil exporters like Saudi Arabia, Iran and Venezuela all want it too. It will happen. The question is when and what will replace the dollar.
Another question comes to mind as well. Isn’t this de-stabilizing for a world in a global recession. The economists over at Vox have a few points to provide on that score using France and the United Kingdom as 1920s parallels for China and the United States. I have highlighted some important bits.
China’s “dollar trap” has many analysts worried about its future resolution. This column discusses a similar situation in the in the 1920s when France held more than half the world’s foreign reserves. France’s “sterling trap” ended disastrously. Sterling suffered a major currency crisis, French authorities lost a lot of money, and subsequent policy reactions deepened the Great Depression.
What are the lessons for today? China’s objective function today certainly differs from those of France in the interwar years. But French experiences in the early 1930s are a reminder that when there is growing risk on reserves currencies, foreign reserves can be both a source of instability for the international monetary system, and a burden for large holders.
There are some graphs on Vox’s site associated with this essay that you should have a look at. My analysis is this: The Chinese want to weaken the U.S.’s power derived through its currency status. They have been setting the stage to do so for some time. However, they want to act in a way that benefits them in the short- and long-term. Cutting loose in an uncontrolled fashion now benefits no one with the world economy in dire straits. However, when the economy does right itself, you should see some major changes in the currency markets.
Hi Rob Z-
I had read Jim Willie’s article and found it very interesting too. Here’s another part Ithat caught my attentiom:
CHINESE OFFICIALS REVEAL THEIR PHILOSOPHY
The Peoples Bank of China has been outspoken in its call for a new reserve currency. A new figure in international finance must be recognized in Zhou Xiaochuan, governor of the central bank of China. In future years, Zhou could become a very prominent person who is at the forefront to break the USDollar dominance in global finance, with full support from Russia. In a white paper ambitiously entitled “Reform the International Monetary System,” Zhou has called for the creation of an international currency unit that will require ‘extraordinary political vision and courage.’ He suggests an initial launch as a blend of the USDollar, British pound, Japanese yen and the Euro, as a super-sovereign currency. It is essentially the makeup of the so-called Special Drawing Rights (SDR) created by the IMF in 1969, in my view a Straw Man device for transitional purposes.
What intrigues me about this is China’s admission that it is accumulating gold. This is bullish for gold over the coming months. China has huge dollar reserves. If they use some of those dollar reserves to purchase gold, the yellow metal is likely going to climb in dollar terms, even though right now we appear to be in a deflationary environment.
As others have said in various references to gold on the CM website, American and European central banks have an interest in manipulating the price of gold, and especially in keeping the price down. China’s emergence as a gold buyer has just introduced a drramatic new factor into the equation.
I was also wondering about this increase in China’s gold reserves. Here’s a new from Reuters (emphasis mine)
SHANGHAI/BEIJING (Reuters) – China revealed on Friday that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tons and confirming years of speculation it had been buying.
Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told Xinhua news agency in an interview that the country’s reserves had risen by 454 tons from 600 tons since 2003, when China last adjusted its state gold reserves figure.
Several gold market participants said they thought China had bought on the international market, helping to absorb hundreds of tons sold off by central banks and the International Monetary Fund in recent years.
"China has been buying via government channels from South Africa, Russia and South America," said Ellison Chu, director of precious metals at Standard Bank in Hong Kong.
But Hu said the increase in China’s stocks was achieved by buying on the domestic market and from domestic producers.
China is the world’s largest gold producer and does not permit exports of gold ingots, only jewelry, leaving plentiful supplies for the domestic market.
China produced 282 tons of gold last year, meaning the state bought around one quarter of domestic production, assuming 454 tons increase in state purchases were spread out over the six years since China last reported a change in its holdings.
It’s difficult to know excatly what’s going on, Chinese just tell what they want and better serves their interests, not necessarally the truth. Anyhow, it looks like they didn’t bought through regular exchange.
Interesting article, fujisan; thanks for posting!
I’m not sure exactly what’s going on, either. But I think some of the pertinent facts, and inferences based on those facts, are that:
– China has HUGE reserves of "ulta-safe" [sarcasm intended] US dollar-based debt. So the continued weakening and potential fall of the US dollar is a direct threat to their financial (and therefore political) well-being. The stability of their country is riding on this;
– China no longer trusts the US’s will and/or ability to strengthen the US dollar. They recognize that it is in the US’s best interest (in terms of reducing its HUGE national debt) to LET the dollar continue to be devalued/fall. I suspect that at first they may have had a hard time BELIEVING that the US would act so irresponsibly and with so little honor. But I think they have since gotten PAST that, and now ACCEPT and perceive that the US is acting in its OWN self interest, without regard to responsibility and honor. Therefore, the Chinese now realize that it is up to THEM to take action to protect THEIR interests;
– China wants to find and implement a solution to this situation that has the best chance of protecting their financial (and therefore political) stability and health, which currently has a dependency on a HUGE amount of US based debt. Therefore: they need to find some way of decreasing this dependency. But at the same time, they need to do so in such a way that it does not trigger an outright crash of the US dollar BEFORE they achieve a position that is survivable, from both a national and international perspective, in terms of their resultant financial and political stability. I.e., they can’t afford to have the US dollar crash until they can survive independent (or much less dependent) of the US Dollar.
I think what we are seeing now in these articles are those visible aspects of China trying to implement such a policy. I guess this isn’t rocket science, and may be obvious to others as well. But it helps me to explicitly try to think through the situation from their perspective as I try to get a better handle on what’s going on, why, and in anticipating where things may be heading.