Aug 052019
 


Odilon Redon Peyrelebade landscape 1880

 

It’s never easy to gauge what exactly is happening in China, or why the CCP Politburo takes the decisions it does. Today, or overnight, is no exception to that. However, one thing that appears certain, but which I don’t see reflected in all the analyses, is that Beijing pushing the value of the renminbi (yuan) down below 7 to the USD in one fell swoop, is a major setback for Xi Jinping and his government.

Yes, China may have given up hope of reaching positive conclusions in its trade talks with the US. And yes, some may think, even in China itself, that devaluing the currency is a tool that can be useful in a potential currency war. But there’s another side to this coin. It’s not even about the value itself, or the change in it, it’s the heavy-handed way it’s executed.

 

China wants, and desperately needs too, for the yuan to be a force in global financial markets. In very simple terms this is true because if it then wants to buy something, it can simply print the money for it. But only about 1% of global trade today is executed in yuan. That is not nearly enough. It means China needs dollars and euros, all the time. And devaluing the yuan means the country needs even more of those.

You’d almost think: why would you want to do that? What are the long-term prospects for a move like this? You’re telling forex markets that the value of the yuan is not trustworthy, because if Xi or the PBOC decides in the next five minutes that it should go up or down by 10% or 20%, they can do it. The Fed and ECB also have tools to manipulate their currencies (re: interest rates), but none of that magnitude.

 

The crux of the dilemma probably lies in the Belt and Road Initiative (BRI), which I’ve been saying for years is just China’s way to sell its overcapacity and overproduction abroad. Sure, there may be loftier goals, and surely in the glitzy brochures, but the fact remains that China has tried to be an economic miracle, doing in 10 years what took the US a century, and it never slowed down its growth, at least not voluntarily, even if that might have been a wise move.

Already lately, purchases by Chinese citizens and companies of real estate and businesses abroad have been curtailed, and not a little bit, by Beijing. There’s no better way to convince Chinese people of the miracle’s success than to let them travel the world and spend there, but that, too, may well soon be cut. It kills foreign reserves.

If Beijing could charge participating countries in the Belt and Road Initiative in yuan, and they could pay for the overcapacity’s steel and cement and what not in yuan, that could be a game-changing program for the entire planet. But these countries have no reason to hold yuan, other than the BRI itself. And they, too, were watching the overnight move above 7 and must have thought: let’s be careful now.

And to top it all off, China right now needs for these countries to pay in dollars instead of yuan, because its foreign reserves are shrinking so fast. It’s Catch-22 all the way down. China’s need for dollars goes against everything BRI stands for.

 

Could the move hurt the US as well? Absolutely. But the long-term view behind the tariffs, and the talks China appears to have lost faith in, is to move the US away from its near all-encompassing addiction to Chinese production, and to move at least some of that production back home. Problem of course is, that is precisely what China’s miracle growth has been built on.

If the US starts bringing production home, who is Beijing going to sell its (over-)production to? Yes, I hear you, to the BRI countries. But there it runs into the currency problems mentioned before. To Europe? The top of that trade route is also behind us. Europe will have to follow the US to an extent, and also bring factories back to the continent (and not just to Germany either).

China could perhaps sell more than it does today to Russia. But that country still does produce a lot of things, and has been forced to be much more self-sufficient due to US and EU sanctions. It’s also a mighty small market compared to 350 million North Americans and 500 million Europeans, who are on average much richer than your average Russian to boot.

 

There is a way for China to make the yuan more important in global trade (but devaluation is definitely not that way): Beijing could let go of its central and total control over the value of its currency, and let forex markets figure it out. That would give traders -and everyone else- faith in the value. Problem with that is, this is not how central control communist governments think.

Beijing wants both: central total control AND a prominent place in world trade. And it may take them a long time to figure out that is not going to happen, unless of course they first conquer the entire world militarily. That is not an option, at least not for the foreseeable future. Come see me next century.

 

It wouldn’t be the first time for me to say I can see China retreat into itself, into its own borders and culture and market (1.3 billion people!). If the Communist Party wants to remain in power, and there’s no doubt it does, this may be only possible choice going forward. If growth has indeed left the miracle -as many observers think-, it can implode in very rapid succession. And even if growth hasn’t yet evaporated, it may well very soon. Without the growth, there is no miracle anymore.

And if China can no longer grow its exports, its domestic growth will also become a thing of the past. Domestic consumption can only grow as long as exports do too. Seen from that angle, the problems with trade and the currency look downright ominous. If you need dollars that badly, and you notice that you’re already getting fewer of them, not more, you’re in trouble.

Devaluing your currency may afford you some temporary respite, but it can’t possibly solve your troubles. It can make them much worse though.

I think China has wanted too much too fast, got carried away and forgot to take care of a few potential barriers to its growth, in particular the standing its currency had and still has in the world, and the grinding need for dollars that stems from it. And the Communists have no answer to this problem.

 

 

 

 

Home Forums Will China Retreat Into Itself?

This topic contains 16 replies, has 6 voices, and was last updated by  christopher cobb 2 months, 1 week ago.

Viewing 17 posts - 1 through 17 (of 17 total)
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  • #48996

    Odilon Redon Peyrelebade landscape 1880   It’s never easy to gauge what exactly is happening in China, or why the CCP Politburo takes the decisio
    [See the full post at: Will China Retreat Into Itself?]

    #48997

    zerosum
    Participant

    The bottom line:
    China, like every country, like every individual, must have enough food to eat.

    If there is a shortage of food, then adjustment are made to reach an equilibrium.

    #48998

    V. Arnold
    Participant

    Odilon Redon Peyrelebade landscape 1880
    A simply gorgeous painting…
    Peyrelevade is a commune in the Corrèze department in central France.

    #49012

    christopher cobb
    Participant

    Well your sinophobia is just astounding, and all of the above could be more accurately said of the USA. It is the USA that will be isolated if they don’t first start ww3.

    #49015

    Dr. D
    Participant

    Yes, but we DO say that about the United States, almost every day. When you spend 100 years getting into trouble, there’s a lot of blame to go around.

    I can only think there are 10 supercomputers on each side scenario-planning these moves. That’s literally beyond our ability to foresee, but you’d be surprised how far a little common sense gets you in comparison.

    Traders today are apoplectic about the moves and Trump (and a bit oddly, as they are generally GOP). “The dollah is a gonna devalue!!! Incoming!!!” Okay, point taken, obviously. But devalue against what? Not the Yuan, I guess, as China beat us to it. The Pound? Don’t look like, at least for a while. The EU, with $10-ish Trillion in derivatives waiting to go off, and the EU possibly ceasing to exist as soon as Italy can figure? Nope. Canada and Australia whose commodities are sagging and housing bubbles are popping? What’s the next currency? Don’t know: it’s so small and far away you can’t read the print without special equipment.

    Not saying that won’t happen, but the goal of politicians is to screw their people white by spending money on their golfing pals and devaluing the currency, you know, like Venezuela, Argentina, Zimbabwe, and for Cobb’s benefit: the United States. But as Bastiat noted, “the great fiction [is that] everyone endeavours to live at the expense of everyone else.” Mathematically this is impossible, but you have irresistible force, i.e. Bernanke’s “device in the basement of the Fed, the printing press”, and the immovable object, i.e. everyone else ALSO has a basement device called a printing press. And they ain’t afraid to use them, clearly.

    But this is only a problem when, as usually happens, you think about the world in terms of “money”, which it isn’t. Money is a fantasy, just a token language you use to represent REALITY, and you can’t print or devalue REALITY on demand. So currency devalue against what? Well, stocks, bonds, blah blah blah, since 10x overvalued, maybe not in this cycle. Houses? Probably passed too. How about WHEAT? How about PORK? How about oranges, corn, zinc, gold? Um, definitely? In that we have clearly and ALREADY started a 50-year delayed cycle in commodities because no one on earth has been about to plant, and no one has a surplus, despite all China’s protestations to the contrary that their people don’t need to eat. What else is “Real” thing, which has no overcapacity and it mathematically constrained? Bitcoin, $12,000, doubled in 3 months. P.S., who will have a trade surplus if Iowa corn rises 20x vs. Keds and iPads?

    And there you go. They CAN all devalue as is their ardent wish. By raising food prices 20-fold, back to the historic average. They CAN do it, but they won’t like it, by swapping the dollar we owe too many of in a partial default, and go back to a gold, and now crypto-standard.

    Oh wait: that’s what the “Global Financial Reset” is. And it’s what people like me have been saying will have to happen for 20 years in order to stop lying, stop endless war and corruption, and right the system. And it’s what China and Russia…and Germany, and Netherlands, and everyone else wants and have been planning for, since they’ve been buying and repatriating stacks of gold. And here we are. A lesson in government and socialism coming up: everyone can NOT live at the expense of everyone else.

    #49019

    Well, yes, my sinopohobia certainly astounds me, too. That anyone can accuse me of having any based on the article, to be more precise.

    #49020

    christopher cobb
    Participant

    You don’t get it…’The crux of the dilemma probably lies in the Belt and Road Initiative (BRI), which I’ve been saying for years is just China’s way to sell its overcapacity and overproduction abroad. Sure, there may be loftier goals, and surely in the glitzy brochures, but the fact remains that China has tried to be an economic miracle, doing in 10 years what took the US a century, and it never slowed down its growth, at least not voluntarily, even if that might have been a wise move.’

    Seriously, WTF? I mean are you being deliberately obtuse? China is an economic miracle raising a billion people out of poverty. The fact that you cannot acknowledge this, and post articles from exiled Chinese economists, i.e.cia assets, as proof positive that china is an economic house of cards, and are astounded that anyone would call you out on this? Give me a break.

    #49021

    christopher cobb
    Participant

    And again if any country is headed for autarchy is would be the USA…god man are you blind?

    #49025

    Diogenes Shrugged
    Participant

    Christopher cobb,

    When national currencies become international currencies, they become tools for trade wars. International currencies are rigged, pegged, manipulated and abused for all sorts of reasons, some of which more political than economic. It appears to me that your comments are akin to crying “racism” after a comment was made about tan lines.

    To my mind, Ilargi was writing about currencies, not China per se. The yuan is becoming an impediment to the Chinese miracle you so vigorously defend. It’s important to keep in mind that what’s being described is a snapshot in time. If the Chinese miracle fades in coming years, it won’t be because of Ilargi. When that time comes, you’ll hopefully return and enlighten us again.

    #49026

    I’m merely saying I doubt the Chinese miracle is really all that miraculous, that’s all. Things can look great until they don’t. You can lift a billion people out of poverty only to see the model you’ve used to do it, and the outcome, crash back to earth. Nothing crazy about that, we all understand that mechanism. Just check the US housing bubble 10 years ago, or the everything bubble we have now. And that’s what I suspect is happening in China right now, something you provide no counter-arguments for.

    #49028

    Diogenes Shrugged
    Participant

    Hong Kong is number two on the list. The beatings MUST continue until morale improves!

    The Reality of Trade Between USA & China

    #49029

    christopher cobb
    Participant

    The US is not moving it’s production home- have you noticed a pickup in US construction of manufacturing capacity? Did you note that truck orders are down 81%? Does the US still have the logistics infrastructure to move this new production capacity? How are the US rail systems? How is the US economy , let alone the morale of it’s already impoverished population going to handle an inflationary spike? None of this is opaque.

    Time will tell, but I hear you Raul- ‘so China raised a billion out of poverty…piffle’

    #49030

    christopher cobb
    Participant

    ‘What’s happening is the US dollar is rising in value (or expected to) and that rise in effect lowers the value of the Yuan. The same is happening to other currencies as well,as the dollar rises. Why is the dollar then rising? There’s a global stampede to safety and that means buying US Treasuries–which are now in freefall in terms of interest rates (and escalating in terms of price). Prices from one year or even less, to 10 and 30 year Treasuries are accelerating. But to buy Treasuries, foreign investors must sell their currencies and buy dollars before buying Treasuries. That escalating demand for dollars is what drives up the value of the dollar, which in turn drives down the value–i.e. devalues-the Yuan in relation to the dollar.

    In other words, the slowing global economy which is being driven by the Trump trade wars is what is causing the flight to the dollar and to the safe haven of US Treasuries. Trump’s policies are at the heart of the global slowdown (already in progress due to fundamental forces stalling investment and growth). That slowdown is what’s driving the dollar and in turn lowering the Yuan. Trump policies are ‘manipulating’ the Yuan.

    China is of course allowing the devaluation to occur. Previously, it was entering money markets to buy Yuan in order to keep it from devaluing. Now it’s just allowing the process to occur. This is China’s response to Trump’s imposing an additional 10% tariffs on $300 billion of China imports last week. It signals that the ‘trade’ war (now becoming an economic war) has moved beyond tariffs.’

    The Global Currency War Has Begun. China’s Yuan Breaks the 7 to $1 Band. Why is The Dollar Rising?

    #49031

    christopher cobb
    Participant
    #49032

    christopher cobb
    Participant

    And here….add this to your China file or whatever….”The trade – get out of the dollar and look at gold … People are totally on the wrong side of this trade right now. People don’t own gold and silver. They’re too long the dollar. They have no idea just how much inflation the Federal Reserve is going to be unleashing. And it’s not going to be good for stock prices. The inflation is going to be in the supermarket, not in the stock market.”

    And that is, and has been, exactly what the world’s central banks have been doing.”

    I’ll be back to enlighten you further when this plays out.
    https://www.zerohedge.com/news/2019-08-06/gold-hits-record-highs

    #49033

    christopher cobb
    Participant

    Diogenes shrugged… time is a river, and you’re waist deep in horseshit.

    #49034

    christopher cobb
    Participant

    And this. ..https://www.zerohedge.com/news/2019-08-06/forget-iran-maximum-pressure-has-shifted-china.

    Maybe do your homework before posting another Langley thought experiment

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