ANALYSIS: Yuan flies into the Cuckoo Nest – will it be a partner or a pest?

cuckoos

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.

 

28 thoughts on “ANALYSIS: Yuan flies into the Cuckoo Nest – will it be a partner or a pest?

  1. China has $3.2 trillion in reserves, over half of which is denominated in US dollars, mostly US Treasury notes. The dollar has no greater friend than China because its wealth is held in dollars. Still, inflation looms. China cannot dump its Treasury notes; the Treasury market is deep, but not that deep.

    If Chinese selling of Treasuries became a threat to US interests, a US president could freeze Chinese accounts with a phone call. The Chinese know this. They are stuck with their dollars. They fear, rightly, that the US will inflate its way out of its $19 trillion mountain of debt.

    China’s solution is to buy gold. If dollar inflation emerges, China’s Treasury holdings will devalue, but the dollar price of its gold will soar. A large gold reserve is a prudent diversification. Russia’s motives are geopolitical. Gold is the model 21st century weapon for financial wars.
    From:
    http://www.telegraph.co.uk/business/2016/04/17/gold-is-the-spectre-haunting-our-monetary-system1/

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  2. wednesday is when china gets into bed with ‘swift’ the swiss outfit for business settlement… a kind of international clearing facility that bypasses usa. but surely people will always convert the $ to yuan until no amount of dollars will buy an ounce of gold………………

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  3. Since when did “swift” by-pass US…I thought it was the other way round

    I thought the US usedf swift to freeze out those it did not like from international trade eg Iran until recently

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  4. While gold is still in debasement, it’s a good time to put some in the attic. Nurse Ratched might not like it, but remember what happened to the cigarettes: the threat of ECT is unlikely to keep the Chinese (and those of a like mind) in a padded cell for much longer. The real crazies are the ones running the asylum.

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  5. Bertie Bear: Correct. Swift is Begium based and bows to the US. The Russians and Chinese seeing the politicisation of Swift over the Iranian sanctions and potentially Russia are creating their own clearing system that can bypass Swift if neccesary. I’m not sure whether it is operational yet or not but it is their insurance policy against US hegemony.

    With regards China’s gold holdings. Officially they are less than 2,000 tons compared with the US’s claims of 8,000 tons (they have probably leased most of them to the bullion banks who have sold them into the markets and much now sits around Mrs Wang’s and Mrs Patels necks) and the EU’s 10,000 tons (ditto). For the US and Eu to get much of their gold back the bullion banks would have to buy it in the market and it is simply not their in size at today’s prices.

    However, the PRC Government has three places it holds gold: SAFE, CIC and the thirs I can’t remember at this point. only SAFE’s holdings are reported to the IMF. It is a given that the Chinese governments total gold holdings are in excess of 4,000 tons and probably approaching the US’ notional 8,000 tons.

    At some point when the next financial crisis hits, if it is big enough then it may be neccesary to rejig the international monetary system and it is possible that gold will have a renewed role in a new Bretton Woods fixed exchange system. It would be at a much higher (multiples higher) gold price that today’s $1,250. At that China’s voice at the table would be at least equal to the other big dogs. The US will fight it tooth and nail but the golden rule still applies ‘ he who has the gold makes the rules.’

    Watch tomorrow: the Shanghai Gold Exhange goes fully operational. It is a yuan based bullion (not paper) gold market. It will establish a yuan price of gold bullion that will compete with the LGMA and Comex dollar paper gold price. At the beginning they should be equal but watch what happens in a panic. Shanghai will be the price setter.

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  6. AEP needs to wake up no matter how much China devalues and it can be brutal if the people in the west do not have money to spend it is a futile exercise. In fact for AEP if there is no trade whatever price you would like to charge for something is just pie in the sky except where the algos / speculators are gambling to make money.

    Besides the point though a far more interesting concept is Hungary borrowing in yuan and not the dollar. Now this Viktor Orban got his head screwed on right, if you borrowed in dollars you can be ousted economically as the market is manipulated to make it happen. So for Hungrary a very shrewd move IMHO because the US/EU despise you.

    http://www.zerohedge.com/news/2016-04-17/hungary-issues-sovereign-bonds-denominated-yuan-another-nail-us-reserve-currency-sta

    The question is what country is next and as for anybody saying Hungrary is stupid, the exact same could be said of many South American countries who borrowed in US dollars when the US will do whatever is necessary to preserve its own economy including sinking any and all others connected in the process.

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  7. Viktor Orban is that rare thing, a Great Man. He has displayed more vision than the entirety of EU/EG/ECB/EC drivelboomers.

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  8. Always worth giving the enemy’s bollocks a good scrote, sorry scrute, all too often they’re firing blanks.

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  9. JW, apologies for off topic, but do you have any info on the Nuit Debout movement ,I believe there are many demos thru;out France, but the UK MSM are not reporting, .obviously afraid of contagion.

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  10. John, I wondered reading this what relevance whether the yuan does this or that. Perhaps I am not in your target audience as I only live in main street. I am more focused on the cuckoos nest in brussels, and like to read about secret meetings a la nuit debout in the forests of the dordogne where skills can be shared and action plans hatched that actually make a difference.

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  11. @JW . Bollocks are germane mein Schatz. Germaine sounds too much like me . But there again so does Germane — I cannot lose. I come up with the goodies every time !

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  12. Its funny watching the UK and Europe in time, succumb to China/Russia.

    America played its hand poorly. The only question is when are they gonna play the War game card?

    Liked by 2 people

  13. You looking very dapper in your photos. Not sure that its enough to land a woman without hrt attitude in this difficult day and age.

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  14. SWIFT has existed in the US for a number of years.
    The US may have another minor problem looming – Saudi officials have warned US lawmakers that the kingdom will sell billions in US assets if Congress passes a bill making it legal for the survivors of terrorism to sue foreign governments. The bill is related to 28 (redacted) pages missing from the 9/11 Commission report. With the price of petrol in the US dropping to under $2 a gallon, the Saudis are reported to be switching investment into solar energy of which they obviously have an unlimited supply, the problem being storage. China also investing heavily in solar suggests that a breakthrough in storage may not be far away- then what price oil?

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  15. Coincidentally I’ve also dug out my old guitar and came upon a fantastic website “justinguitar” which has so much free stuff for us poor churchmice. I’m learning “3 Little Birds” and love it this time. More relaxed, more fun than it used to be now I don’t care about being brilliant.

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  16. Don’t really understand the highbrow economics, or read wall street weekly so unable to comment on this.
    Im a supporter of dollar and the USA, but many think they like to see the yellow man on top of the pile. Us will make sure that never happens. More important things to think about in my lifetime. So off to the swimming pool now for some exersise and then a nice film at the cinema

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  17. Playing along to Kapil Srivastava one of India’s best ever guitarists is very relaxing. We use a lot of pataks curry pastes and add chillies for maximum effects. When the neighbours complain about the noise and the smell we know that we have achieved Zen.

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  18. I must say I find the ‘need to be subservient to a 300m+ Empire’ a worrying concept.

    I don’t really understand why you couldn’t have 50 – 100 smallish nations forming an independent trade bloc, specifically excluding any nation >100m people from membership. Such a bloc would see things from the viewpoint of small-to-medium-sized nations and understand that only by working together could they succeed.

    As things stand, the Chinas, USAs, EUs, Indias and maybe the Brazils and Russias are the only ones who could consider being top dog and winning. All the rest of us must be meekly obedient poodles.

    This really doesn’t have to be the ‘natural order of things’.

    It’s just the ‘natural order of things’ when you submit to hyper-aggressive bullies…….

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