Gold Fingers China

I've thought for some time that it makes sense for China to develop a long-term plan to float the renminbi yuan. China would benefit from the development of reserve status and interior investment, and could address it's deficit with dollar-denominated ASEAN commodities as well as escape from the parasitic political interdependence which it has developed with the United States.

Floating a currency is no easy matter, however. If China simply allowed people to trade in it's cash, the RMB would simply rocket, the dollar would be undermined, and China's export and lending advantages with the US would become millstones. Equally, developing an internal market with foreign money might put China on the course to even higher inflation and to the dependence on foreign markets and metastasizing derivatives which it loathes.

So there are, logically, four things that China ought to have been doing for the past three years. I've detailed suspicions about them here, but I'm pleased to see wikileaks now confirming what I had suspected. Well, I write pleased. Pleased in the way that you realise that you were right about the spider in the cupboard, which is to say, not pleased at all.

Firstly, if I were the Chinese government, I'd be setting up a smokescreen which also functioned as a plan-B by encouraging talk of the use of the International Monetary Fund's Special Drawing Right as a global currency. There would be an appeal to this, in that western smart-alecs could latch on to it as a way to drag out talks and because the SDR doesn't depend upon bonds.

The SDR is a weighted unit, now used (if you look at your aircraft ticket clauses) in insurance assessments and as a sort of exchange-denominating credit by the IMF. SDRs have been going since 1969, after the Vietnam war sunk the dollar but before Richard Nixon acknowledged the fact. I think that I am right in writing that Jim Callaghan claimed credit for them in his memoirs, but Jim didn't really understand economics any more than Gerald Ford understood the mortgage derivatives invented by Fannie Mae and Freddie Mac in his time. The real creators remain obscure.

Anyway, the weighting of the SDR unit depends on investment in the IMF, which functions a little like a company. So China publicly hinting that it wants to go for the SDR is really a statement that China wants to play nice, knows its bond market is too small, and will invest its dollar and euro surpluses back in the managing company of the west.

Some of our strategic genii can be expected to fall for this. After all, it makes sense. All good smokescreens do.

However, China has also been up to other things. It's been purchasing commodities as though there is no tomorrow. Western pension funds have been slow on the uptake here, diverting money through false equity rallies to the stock market and Treasury bonds, and to gold certificates. Yet gold mines near China which are not controlled by Russians, physical gold, and copper and coal stocks in the Pacific rim countries have all gone up.

This accumulation of resources is a way of hollowing out the ground beneath the US. The dollar is still merrily being used as an international reserve currency, but increasingly, the dollar is Cuban; which is to say, there is an international dollar which holds up as China accumulates real assets, and which others use as a faith-based currency, and a digital domestic dollar, mostly found in ATMS which is diminishing in purchasing power and in circulation (a paradox until one considers the American credit market) at the same time. That second dollar is attached to a failing economy which is still capable of feeding and powering itself, just, and so which does not understand, which is not told by it's stupid manipulated media, what is happening.

So the second thing China is doing is building up assets and avoiding direct confrontation with the dollar. It's interesting to me to see wikileaks confirming that this week.

China is also, on a third track, acclimatising the world to the RMB in the long run by issuing bonds through the Hong Kong Markets and allowing them to be traded. Looking back through the figures, these bond issues are usually preceded by high activity in the gold markets about a month before, which I take to be a manifestation of the Chinese developing a hedging fund.

Fourthly, the overall impact of this strategy is being disguised because the Chinese are washing profits through the eurozone bond markets, which offer excellent opportunities for political and economic arbitrage, and through around 60 banks to which European governments are now beholden.

I'm tempted to say that it is fairly obvious that this is happening, but we live in lalaland at the moment, and perhaps others can perceive other patterns beneath the smoke. Like many satisfactory suspicions, however, it makes sense and is confirmed by most new releases of data. The glimpse of things which wikileaks has provided strikes me as an obvious point to pray in evidence.

Looking over it all, cultures don't change, do they? As Sun Tzu argued centuries ago,
"Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win"
Our lads need more than luck.


Anonymous said…
Being crass I had to point out how delightfully 1980s era porno sounding this title was.

Martin Meenagh said…
lol. Well, I aim to please. There's no way, by the way, that your second name can't seem like an opinion, but I'm used to it (having an Irish mother :))