THE POSSIBLE REPERCUSSIONS OF «LIBERATING» THE YUAN

THE POSSIBLE REPERCUSSIONS OF «LIBERATING» THE YUAN.  Part II of: On The «Bombshell» Dropped by China on 20 November 2013 

By Valentin Katasonov 01-12-13. http://www.strategic-culture.org/news/2013/12/01/on-the-bombshell-dropped-by-china-on-20-november-2013-ii.html

Back to Part I if you wish  Or  click http://www.strategic-culture.org/news/2013/11/29/on-the-bombshell-dropped-by-china-on-20-november-2013-i.html

Here the continuation of Part 1

We, however, are not going to put a lid on it as the Chinese liberals would like to do, but are going to continue examining the chain of cause and effect: 

1. A free yuan would begin its own rapid rise; from cheap, it would quickly become expensive. 

2. A rise in the yuan’s exchange rate would lead to a fall in the international competitiveness of Chinese goods. There would be a relatively rapid fall in the volume of exports, and imports would increase. China’s surplus trade balance would quickly switch from positive to negative. 

3. The enormous foreign-exchange reserves that China has at the moment would, over several years, melt away like the winter snow melts into slushy puddles. 

4. Chinese businesses, deprived of a market, would begin to grind to a halt, and millions and tens of millions of employees would find themselves out on the street. The real economic sector would quickly begin to deteriorate. 

5. In order to stop businesses going bankrupt, and for the government to import essential goods, China would have to resort to help from foreign creditors and investors. 

6. The West would give this kind of help willingly. As a result, assets in the Chinese economy would pass into the hands of transnational corporations, while in terms of external public debt, China would be in a worse position than Greece is today. 

7. In dismantling its foreign exchange regulations for capital transactions, China could find itself completely unprotected from the impact of global financial crises. Speculators like Soros could start speculating on the fall of the yuan. China would then need their foreign-exchange reserves to withstand these financial speculators, but would no longer have them. 

8. Very quickly, the yuan would become a weak currency, having lost even those few signs of an international currency it has now, in 2013. Moreover, the weakness of the yuan would not depend that heavily on whether the dollar maintains its own position or not. The yuan would be weak against the currencies of those countries that have preserved their real economic sectors. 

THE UNFORTUNATE EXPERIENCE OF JAPAN

At this point, one could think of the dismal fate of Japan, which two decades ago seriously thought that the yen could draw level with the US dollar or even replace it. Incidentally, based on many relative economic indicators, the Japan at that time looked even better than China looks today. Present-day Japan is still in the world’s seven leading economically developed countries, although it now plays second fiddle. 

Let us once again go back to the outcome document of the last plenum of the Central Committee of the Communist Party of China. It particularly highlights the need for the rapid currency liberalisation of China’s capital transactions. Put simply, in order to carry out cross-border transactions (the export and import of capital), Chinese and foreign investors should not experience any kind of difficulties in converting the yuan into foreign currencies or, likewise, foreign currencies into the yuan. 

Why the hurry? Evidently, the Chinese liberals are working out their chess game more than one move at a time. They are aware that should the yuan’s exchange rate be liberalised, the country would very quickly be deprived of export revenue, with everything that that implies. They are aware of it, and are expecting export revenue to be replaced with money from foreign investors. The latter would require a full conversion of the yuan, of course, not only in order to invest their own dollars and euro into the Chinese economy, but also in order to freely withdraw investment income from the country in those same dollars and euro. However, replacing export revenue with foreign investment is an extremely complicated business. Suffice it to say that in 2012, revenue from Chinese exports amounted to nearly USD 2 trillion, while the influx of direct foreign investment in the Chinese economy was just USD 120 billion. No kind of currency liberalisation is able to guarantee complete substitution, if for no other reason than that the world does not yet have that amount of direct international investments. Also in 2012, direct cross-border investments as a whole consisted of just USD 1.3 trillion. 

As global experience shows, the full liberalisation of capital transactions in countries on the periphery of global capitalism usually leads to speculators with their hot money, rather than strategic investors, swooping down on the country. Investors like these do not develop the economy, but pick at its assets and destabilise the work of those businesses still clinging to life. The full liberalisation of capital transactions at the end of the 1980s-beginning of the 1990s that took place in a number of ASEAN countries known back then as the «Asian Tigers» resulted in these tigers becoming pitiful kittens. The result of liberalising the movement of capital fully emerged during the financial crisis in Southeast Asia in 1998. It inflicted incalculable damage on the economies of these former tigers... 

At the November plenum of the Central Committee of the Communist Party of China, emphasis was placed on stepping up the export of capital from China. A strong yuan is definitely needed to improve the efficiency of this kind of export. Following the cancellation of the yuan’s controlled rate of exchange, the Chinese currency’s exchange rate will go up for a time. I do not know how long this growth will continue. Maybe a year or two, but it is unlikely to be more than that. This is the time that capital should be withdrawn from China and invested in financial and non-financial assets in other countries. It seems that Chinese liberals are getting ready for the escape of capital (and their own capital at the same time) from the country of «victorious socialism». Liberal Chinese officials only need highbrow conversations on the yuan as an international currency and currency liberalisation for an escape from the country. As it happens, according to the international non-profit organisation Global Financial Integrity (GFI), during the first decade of the 21st century, capital was illegally removed from China to the tune of USD 2.74 trillion. In 2010 alone, the illegal withdrawal of capital amounted to USD 420 billion, which is approximately equal to one quarter of China’s total export revenue in that same year. The removal of capital from China is risky for its organisers and beneficiaries (corrupt officials and associated businessmen). It is these shady exporters of capital that are primarily lobbying for the speedy cancellation of all restrictions on the withdrawal of capital, the conversion of the yuan and its transformation into a strong currency. 

ON THE FEARS OF MICHAEL SNYDER

Let us once again return to Michael Snyder’s article. He is an American. Therefore, he is most concerned about the repercussions for America of the People’s Bank of China stopping any further accumulation of dollars. In his opinion, the brunt of the Chinese bombshell will fall on the United States. America has still not had time to recover from the events in October of this year. You will recall that government funding in the country was put on hold because the US Congress did not approve the federal budget for the next financial year. And the main reason why it was not approved is that the government had exhausted its borrowing limit. The events in October show how shaky the well-being of satiated America really is. It depends on countries like China that are faithfully buying up US Treasury bonds. In October this year, every tenth dollar of these bond loans was from China. Losing 1/10 of its loans would be keenly felt by America. What is more, other donors to Uncle Sam could follow China. The US Treasury’s loss of nourishment from China could lead to a sharp rise in interest rates on US government bonds, which could lead to a whole host of problems for the American economy. A significant rise in the percentage of so-called interest expenditure (expenditure on the servicing of public debt) in the federal budget, for example. A rise in the cost of loans and credit lines would also become unavoidable, which would put paid to any hopes of restoring the American economy as set forth in the quantitative easing programme. 

Yes, Michael Snyder and other Americans do have cause for concern. For the moment, however, China cannot be regarded as the main reason for America’s troubles. The fact is that in September 2012, the US Federal Reserve System launched a third round of quantitative easing (QE). Its official aim was to restore the American economy, which was suffering from the financial crisis, and bring unemployment down to a safe level. To accomplish this, the FRS throws USD 85 billion into the finance and banking sector every month by purchasing the mortgage-backed securities of American banks on the secondary market (for USD 40 billion) and US Treasury obligations (for USD 85 billion). Quantitative easing has resulted in the Federal Reserve becoming the main buyer of Treasury securities over the last year. Foreign central banks and other buyers have found themselves with very little. Why the FRS made such a sharp turnaround over the last year is difficult to say at present. Maybe it is because Washington decided to insure itself against possible boycotts from central banks in other countries. From this it follows that: even if the statement by a high-ranking official from the People’s Bank of China on 20 November becomes a reality, i.e. the central bank of China stops buying American securities completely, the collapse of America will not happen immediately. The collapse of America might happen, but for a different reason – it will be because the Federal Reserve is unable to withstand the overload caused by the need to purchase enormous amounts of US Treasury bonds. 

CHINA ANTICIPATES DIFFICULT TIMES AHEAD

For China to stop accumulating dollars, meanwhile, would be suicidal. The Chinese economy is like an aeroplane that has been circling in the air for a long time because the pilot cannot see a convenient place to land. The petrol is running out and there is a danger that the aeroplane is going to plummet to earth. Beijing could only have decided to stop its accumulation of dollars if it had an alternate airfield on which it was possible to land the aeroplane called the Chinese economy. This airfield should be understood to mean China’s domestic market. The Chinese government has been conscious of it for a long time and over the past ten years has made weak attempts to reorient its manufacturing industry and other sectors of the economy towards satisfying domestic demand and creating a single national economic system. The country continued to be dragged along its tracks by the West, however, until the end of the 1970s-beginning of the 1980s. The country was unable to move over to the rail tracks of independent economic development. China did not have a domestic market then, just as it does not now, which is why it depends on external markets and the American dollar. 

It appears that any plans to reorient the Chinese economy towards the domestic market were put paid to at the November (2013) plenum of the Central Committee of the Communist Party of China. The Chinese government decided to continue its policy of further integrating China into the global economy, but the nature of this integration is changing before our very eyes. Beginning with Deng Xiaoping, China has spent the last three decades conquering the world’s commodities markets. The country turned into a global workshop serving half the world, and China was the model for a dependent type of industrial capitalism that had retained its socialist rhetoric. Socialism in China is understood to mean an eastern variety of state capitalism. Following the global economic crisis, since about 2010, something has emerged that Beijing finds completely unacceptable: China’s opportunities for the extensive development of the world’s commodities markets have been exhausted. The country’s economic growth rates have begun to slow, which is not yet a catastrophe, but it is worrying. Between 2010 and 2011, China’s party-state leadership agonisingly searched for a way out of the emerging impasse. The 12th Five Year Plan, adopted in 2011, implicitly reflected the adjustment of the country’s economic policy: an orientation towards the speedy development of its domestic financial market, the gradual opening up of this market to the outside world, and the development and conquest of the world’s financial markets. China’s leaders embarked upon a policy to transform industrial capitalism into financial capitalism. 

Financial capitalism has already been long-established in the countries of the «Golden Billion», however. The West, and first and foremost the United States, does not need competition in the form of Chinese financial capitalism. China’s creation of its own domestic financial market, the partial internationalisation of the yuan, and full monetary and financial liberalisation are just speeding up China’s conquest by the Grandees of Western financial capital. There is a strong possibility that China is going to be facing some hard times in the years to come.

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