Basket case or Golden Eagle? The Slog doubts that a convertible Yuan will play things by the rule-book written in Washington

SQUARE.JW.01There is the old adage that “opinions are like arseholes, everyone’s got one”. This has rarely been more true than in the case of China, its new soon-to-be-convertible Yuan, and its relativity to First World financial transmission alongside Third World growth.

Some folks seem to like the freedom to hold two opinions at the same time, and Ambrose Evans-Pritchard at the Maily Torygraph is one of them. He wrote a piece earlier last week saying that China “urgently needs a 15% devaluation” in order to become more competitive; two days later, he writes to tell us that ‘Chinese credit stimulus and a 20% rise in public spending has set off a fresh mini-cycle of growth that is already sucking in oil imports at a much faster pace than expected’.

But this “much faster pace” of oil consmption isn’t really borne out by IMF expectations of a rise in China’s GDP by 0.2%……which will still be 0.7% below what was being forecast 18 months ago. I remain puzzled as to who’s going to buy this oil once refined (China is now stockpiling it – why aren’t we?) and what these new service industries are that need petrol. But anyway, AEP’s heads-up is this: if China can just get the Yuan to devalue by 15%, its desire to stockpile oil will save Saudi Arabia’s bacon. Which won’t do them any good, because bacon is forbidden to Islamics.

Ambrose’s is pretty much the Establishment’s “all problems are overrrated and can be solved” line. At the other end of the spectrum is the out-on-a-limb blogosphere suspicion that China will not allow a conversion rate of the new Yuan against the USDollar at all, thus using this and the newly formed (but highly popular) AIIB to stitch Washingon out of a share in the ‘Bric-alliance’ transition system.

There is some circumstantial evidence for this in that I understand some top US financial/forex negotiators are becoming suspicious of Beijing’s unwillingness to give a pledge in writing that this will happen. On the whole, it isn’t a widely-held view: perhaps it should be. But I doubt if Beijing would pull such a stunt from Day One.

Barron’s says ‘we cannot conceive of a political desire to devalue/depreciate the currency’, in which case they haven’t been looking very hard….or have never experienced the term ‘geopolitics’. Devaluation would be merely to do what Japan tried to do with bonkers Nirp, only far more directly. It won’t work in China either, because the demand problem (like the credit take-up problem) is to do with citizen/corporate anxiety, not price.

Further, if China’s Yuan devalues substantially, consumption of imports by its citizens will fall – something Beijing would like to see, as in real value terms net export contribution to GDP remains below 1%.

And while AEP sees a new growth cycle forming in China, others like Charlene Chu point to the estimated 20-25% of Bank loans very likely to turn bad in the coming months. Under the current globalist mercantile Fred Karno’s Circus, growth isn’t going to take off anywhere if there’s a credit crunch.

The oft-repeated mantra in recent months has been that the Chinese service sector is creating more and more jobs – some say it’s more than industry is shedding – but I’ve yet to see reliable information about such job creation. More and more, I suspect this little niche of “it’s all part of a pre-agreed plan” is complete bollocks.

Cutting to the chase here, the fact remains that IMF staff concluded in a report last November that the yuan was “freely usable,” meaning widely used for international transactions, and widely traded in foreign exchange markets. Alongside this reality of the growing importance of Beijing, however, the auto-pilot default setting of the US media – “America must win” – keeps kicking in. Thus top Wall Street China-watchers, Forex traders and Establishment economists see the change as encouragement to Beijing to make faster progress on promises to make the yuan “freely tradeable” and open its financial system.

I highlight that last phrase there because it’s typical of the way Boombust and others see China as a sort of Boy-King who still isn’t entirely house trained, but is gradually working out who makes the rules and thus is increasingly ready to obey them.

By and large, in Chinese culture short-termism is seen as being for dummies. I think it is obviously true that the Politburo has, on a technical level, been flailing around in something of a headless manner of late. But on the geopolitical dimension, everything the Party does shows it has no intention whatsoever of playing second fiddle in the American Hegemony quartet.

The truth is, we have little or no idea what the longer-term plans of Beijing are, what they might or might not do about Japan, how powerful the younger military officer class is, and how they plan to ‘run’ the empire that is very clearly being built. It feels to me like China is moving into certain regions with the consistent aim of being the dominant influence, driven however more by technical experts, financialisation and corporate ownership rather than Sovereign presence. I would equally say that it is targeting ‘the bullied and the incompetent’ with equal consistency – that is, South America, Black Africa, and (tentatively) Greece and the UK.

One can’t separate domestic satisfaction, economic growth and geopolitical power, or even separate chicken from egg, in the Chinese context. But for me, there is a game plan logic that runs like this:

‘Without investment power and technical expertise, we cannot maintain our geopolitical influence in order to build an Underdog Alliance against the Dollar. From time to time, it is obvious that the Americans are trying to screw us around, and so control of a transmission system and acceptance of the Yuan as the only serious competitor to the Buck is a given. We now have all that in place: Washington is furious about it, but the AIIB has been enthusiastically received, and once we are de jure in the currency basket, we can in time do what we want.”

The IMF loftily declared that it had  ‘determined, effective October 1, 2016, the Yuan to be freely usable’ as an exchange currency. But two things remain unclear:

  1. China has been splurging out on gold purchases for nearly three years now…and mining its own. Western central bank attempts at gold price destruction have helped China achieve a goal that may be very real indeed: to develop the Yuan as a gold-backed currency. Putin’s Russia has been following a similar path, despite being hampered by the oil price collapse. In a Russian and South American raw materials/credit squeeze, a gold-backed freely exchanged Yuan would offer significant risk-off advantages to the fiat decrepitude of the Pound, Euro and Dollar. It would also mean a faster recovery among the bullied, oppressed and hitherto Dollar-denominated debt carriers.
  2. Once in a stronger ‘basket’ position, Beijing could become a cuckoo currency, pushing out the competitor fledgings….especially the Euro. Given China’s investment in Britain already, we will almost certainly never see the euro there….but the UK (or what’s left of it) could very quickly see a commercial economy in which the Yuan is the natural convertible option. The key unknown is when Beijing will decide to not allow Yuan to be exchanged for the Dollar.