China Wants the U.S. Dollar to Drop Dead 24 comments
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China pounds the conference table hard for a new currency order. After a first commentary a month earlier, China now shoots straight against Federal Reserve Notes (FRNs), accusing the USA of plundering the world's wealth with its own fiat currency. The attack does not stop there. Other, unspecified, currencies urgently need to replace FRNs as the world's reserve currency.
The commentary on the front page of the overseas print edition of People's Daily had some advice for Asia and Europe as well. In a not too polite style - a far step from traditional Chinese reserve - both economic regions were told they "should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies."
From the Reuters report:
The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.
The People's Daily is the official newspaper of China's ruling Communist Party. Its articles do not exactly pronounce the leadership's view, but its opinion pieces reflect a growing criticism on the current Euro-American dominated financial system.
Although China remained quiet on the subject when hosting a financial summit with 43 countries over the weekend, their drive towards a financial order reflecting the importance of Asia will not stop. China is well known for its polite stubbornness and a very long term oriented policy while steering the most populous country of the world towards more prosperity.
Yuan's Currency Controls Make It a Non-Contender for Reserve Currencies A Reuters analysis from Monday concludes that the Yuan is not going to become a reserve currency anytime soon, citing officials of the Chinese central bank. It also said that criticism in the US's affairs are overshadowed by the risks for China of holding so many dollars in its reserves. China's FRN reserves have surpassed the TRILLION mark long ago, it is estimated.
Interestingly, the People's Bank of China website links from the front page to its balance sheet from 2004 only. A lot has changed since, considering the foundation of China's sovereign wealth fund, that used part of its $1.3 TRILLION treasure to buy stakes in US corporations and now registers heavy losses on these early investment ventures abroad.
Getting Out of the Dollar With As Little Damage As Possible
China's long breath on the issue may be part of the tactics applied. First it will want to divest out of US debt with as little damage and losses as possible. Chinese economists know very well that the country could choke the US debt market any minute. I would not count on any friendly support from the dragon country.
Britain's opium war plays as much a historical role as the long reign of Communist leader Mao Zedong as does the reintroduction of university classes in Confucianism, a philosophy once regarded as "overcome" by the communists. What feelings would you have for your former oppressors?
While playing it on the moderate side at the financial summit, official Chinese media drove home a couple of points on Monday, showing the muscles China has while suffering from the global slowdown.
According to a release on China's government website,
China's share of the world's combined gross output rose to 6 percent at the end of 2007, compared with just 1.8 percent in 1978 when its reform and opening-up began, the National Bureau of Statistics [NBS] announced on Monday.
Fast economic growth over the last 30 years had lifted China's GDP ranking in the world from 10th in 1978 to fourth after the United States, Japan and Germany.
It stood at 3.28 trillion U.S. dollars in 2007, about 23.7 percent of that of the U.S., 74.9 percent of Japan's and 99.5 percent of Germany's, said an NBS statement on its report on China's development since 1978.
By the World Bank rankings, China was a developing economy falling into the category of lower middle income, with per capita income ranging between 936 and 3,705 U.S. dollars.
Per capita income jumped to 2,360 U.S. dollars in 2007 from 190 U.S. dollars in 1978.
Take such news as a strong sign that China will insist on a bigger international role according to its phenomenal growth in the past three decades. In stark contrast to the slowdown in Europe and the USA, official Chinese figures confirm the expectation that China will manage a controlled cooling of its economy that was in danger of overheating only a year earlier.
According to Chinadaily,
China's economy, one of the fastest-growing economies in the world and the biggest contributor to global growth, grew 9.9 percent year-on-year in the first three quarters of this year.
In the third quarter, the gross domestic product [GDP] growth rate slowed down to 9 percent, the lowest in five years, from 10.6 percent in the first quarter, 10.1 percent for the second quarter and 10.4 percent in the first half of 2008.
China's economic growth has been on a steady decline since peaking in the second quarter of 2007.
Inflation in a Downward Spiral
At the same time China managed to contain inflation:
Another widely watched indicator, the consumer price index [CPI] - an important measure of inflation - rose 4.6 percent in September, over the same period last year.
The figure, coupled with 7.1 percent in June, 6.3 percent in July, 4.9 percent in August and a nearly 12-year-high of 8.7 percent in February, shows the CPI in a downward spiral.
Analysts mainly attribute the decline in the CPI to ample grain supply and lower-than-expected income growth of Chinese residents, as the housing and stock markets take heavy toll, which dented residents' desire to consume.
Click to enlarge
GRAPH: China has managed a controlled economic slowdown despite external and natural disasters. Chart courtesy of Chinadaily.com
Chinadaily has another commentary that clearly signals that the country aspires to much more than just an also-ran in the international world order. Or how would you interpret the headline "New order needed to meet global challenges?"
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This article has 24 comments:
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I think many of the dollar bears do not understand the extent to which the U.S. government has used monetary and economic policy as a means to a geopolitical end and focus too heavily on just economics. The end of the U.S. dollar as a global reserve currency will have much greater negative implications for the U.S. government and conduct of foriegn policy, whereas in the longer-term, the U.S. would actually benefit economically because it would return to it's pre-WWII position of a mainly economic power. China, Russia and the EU want geopolitical power, but the U.S. will be free to enact an industrial policy which moves manufacturing from Europe and China to the U.S.
The rise of Asia and Europe was done on the back of U.S. economic concessions aimed at creating strong allies to fight communism. An end of Bretton Woods is the end of the U.S. as the world's policeman, and the return, if it chooses to enact reforms, of the U.S. as the world's premier economic power—no doubt aided by massive exports of advanced weaponry to various powers that will soon need to pay for their own military defense. There's also a possibility that a right-wing government would pursue financial reforms along the lines of Swizterland, turning the nation into a heavily fortified tax haven. Once the U.S. is no longer obligated to dole out economic favors in return for political and military concessions, the room for economic action increases greatly.
Yesterday I began to take advantage of the $US strength to begin to sell. For all the reasons mentioned above and the fact that 65% of todays foreign exchange reserves are held in $US convinces me this is the turning point in the global currency markets.
There will be a new world order.
From your lips to God's ear. This is precisely what the US should do, serve as an example to the rest of the world and QUIT making enemies.
As for reforms, mostly what is needed is an honest banking system. This would eliminate the boom/bust cycle which threatens world peace.
The real hidden story is the, US $ dollar against the renminbi, is losing value in anticipation of the potential for a “Great Game like Conflict”.
What China has the appearance of engaging in already:
1) Asian Central Banks are un-funding or slow-to-uptake of US Treasury Auctions and GSE Fundings
2) Asian Central Banks Denominating out of US$ reserves.
3) Other currency gymanastics by China
CURRENCY-Flight out of US$ = Destabilizing the US$ DOLLAR based Credit…and Banking
.... Asian Central Banks that are un-funding US$...
The geopolitical game is about to change. This commentary is only the start. If the US continues on the borrow and spend binge expecting China and Japan to continue funding the excess we are in for a rude awakening soon. Future statements may be more pointed and contain the implied "or else" as the main persuasive argument.
If the Chinese made a point of dumping their USTreasury holdings and US$ reserves on the markets it would crush the US markets and economy. Interest rates would skyrocket as one of the main purchasers of US debt would be selling instead of buying. Others would be forced to follow suit or lose billions on their reserves as well. It wouldn't be pretty.
The US has been borrowing and 'dancng' for a long time. The piper just announced that he intends to collect his pay sometime soon, one way or another.
China, unless it develops internal market, will never be richest economy in the world. You can't do it on export alone.
As for losses of sovereign wealth fund, that's life. Nobody guarantees profit on bond or stock market. Every contract with brokerage has words: "securities may lose value". Same applies to real estate, although some people forgot that.
However, for someone with a long term investment timeline, trying to take advantage of this seismic shift in power, I think the recommendation would be to buy Chinese Stocks.
Not just any random companies, but solid non-export oriented companies that is focused on China's internal economy.
Couple of ideas come to the front:
- Infrastructure
- Insurance
- Internet
- Food/Seed companies
Good thing is that Chinese Stocks have dropped so much, that with this long term strategy, that buying them now could make one very wealthy.
Although the "headline" number of export/gdp ratio is 40%. It is very misleading. (As an example, Malaysia's headline ratio is 104% of GDP!) Because it doesn't strip out the cost of the goods used to make the export. Look at the study by UBS (link above): Chinese actual "value-added-portion" of export is only 9% of GDP!
It's domestic consumption is 40% of GDP and the central government now had room to grow that up to maybe 60%. Already, export has been slowing for more than a year (remember USA's Christmas orders are all "filled" in China by July, so China's whole year's export numbers are pretty much already known by this time) and yet the expected GDP for 2008 will be north of 9%.
I think a lot of people will be caught off guard by how well China rebounds in this crisis. A lot of people who're short Chinese stocks or sold their china-emerging-market stocks too early will regret it.
seekingalpha.com/artic...
And, China's one-child policy has been in place for about twenty-two years; soon the population will start to decline and age. Isn't that a formula for long-term collapse?
If a book comes out with the title "The China That Can Say No," then we can worry. Though by then my worries would be with the Shanghai Composite as they should have been with the Nikkei.
$1.8 Trillion not $1 Trillion and the Chinese currency had kept pace with the US, so they were up around 20% against all of their trading partners, not good for an export driven economy.
China exports roughly 22% of its total to the US. Devaluating the dollar is in its best interests.
But don't worry, Barak Hussein Obama will CHANGE everything. Socialism will show the Chinese that we are just like them. He will redistribute the wealth to help the masses just like the Russians and Chinese did decades ago.
So for the near term we will continue in deep economic problems. For the long term the markets will win out. However, wtih dangerous gvernment policies and ignorance on how the government could really help there is nothing to look forward to but a depression.
This comes as an extraordinary and extravagant benefit of being the reserve currency with no real backing.
However as the ugly side of american power becomes more obvious, there will be resistance to backing it in this way.
The way out will be slow and tricky to avoid a violent us backlash comparable to the Nixon break from the gold standard in response to french and british demands for payment on us debt.
For my part, I would want the candidate that promises to give me something for doing nothing.
Vote for Barak Hussein Obama, let Socialism finally come to america.
Discussion of replacing US$ as reserve currency started in Europe and gulf states long before China came on the scene. China has to be very protective of US$ when 70 to 80% of her two trillion $ foreign currency reserve is in US$. During the current financial crisis, US$ becomes stronger, even stronger than gold. That is what China is doing. Come on say something which make sense!
what are we and the remainder of the world to do upon the demise of the dollar?? don't worry about china, start here at home.
china's economic development is significantly behind USA/EU. china can repeat what was done by USA/EU for the past century. they're using our dollars to buy up resources throughout the world. the population age/erosion can be fixed like the USA is fixing our. or had you not noticed our wide open immigration practice?