We’re stating the obvious here, but China is riled by Trump. There is a growing confrontation between the two powers regarding currency, North Korea, the South China Sea islands, and the “balance of power”.
Donald Trump hasn’t been in the White House two months, and yet his obfuscated mind is causing China to hemorrhage money. Rich Chinese are siphoning their money out of China (because of Trumpophobia) to safeguard their wealth ahead of future depreciations of the renminbi. China itself is being bled, with US$1 trillion in reserves gone. There is $3 trillion left: $1 trillion in assets, $1 trillion in liquidity, and $1 trillion specifically for propping up the Chinese banking system.
As current tactics are failing, what will the Chinese Communist Party (CCP) do? Raise interest rates to make the renminbi more attractive, slap on further capital controls, or devalue the currency?
Immediately, let’s rule out raising interests rates, which would further dent the Chinese economy and bankrupt companies. Interest-rate increases would threaten jobs, and the government needs to create jobs, both superfluous and useful, to maintain its legitimacy and prevent (taboo to mention) civil unrest.
As I get the train in Beijing, I notice a superfluous amount of bored Chinese acting as quasi-security officials with metal detectors. There is no need for this security, but any opportunity to create jobs legitimizes the CCP. Remember, the Chinese public is volatile. They would riot if there were a drop in job availability. Tiananmen Square started as an anti-inflation protest and transformed into a speech protest. The government doesn’t want a Tiananmen 2.0.
Capital controls are not stopping the currency flight out of China either. China is making billions of dollars’ worth of legitimate payments daily, as it’s nearly an open economy, and so can’t really instill concrete capital controls. Money is scaling the new “Great Capital Wall” of China and escaping through Hong Kong and fast-hand financial tricks.
Alas, renminbi devaluation will be difficult without Trump interpreting it as a malicious act. Remember August 2015? The Chinese devalued the renminbi and the US stock market crashed. The Chinese are using their US dollar reserves to buy renminbi to prevent its devaluation. How long can that continue at the current rate? Not for more than a year. However, the only option is devaluation. And what is Trump throwing a tantrum about? A devalued renminbi.
Trump also wants help with North Korea, which is improving its missile technology, but the Chinese can’t help because they don’t want Pyongyang to retaliate and allow a million starving Koreans to cross the border and destabilize Manchuria. Trump also thinks he has a titillating idea of buffering Taiwan further against the mainland, not to mention preventing Beijing from claiming islands in the South China Sea as its sovereign territory by erecting military structures on those reefs to gain access to undersea oil and fish to feed their population (a bit late to prevent this). The Chinese won’t back off because they must save face.
Finally, some Trump advisers don’t believe in free trade. The current free-trade proponents champion this financial ideology, but ignore its negative manifestations of inequality, deregulation, privatization, and retention of profits for the benefit of stratified corporations. Trump wishes to stifle this system, while simultaneously beating back America’s largest rival, which he thinks has benefited the most from this system. To do this, his advisers want rapprochement with Russia, to pry the only other of the world’s three primary powers away from China.
In response, who can China try to pry away from the US?
As Brexit negotiations formally begin next month, we must look to the subtle Sino-Anglo alliance that may be slowly forming between Beijing and the City of London, a quasi-pseudo-city-state within Greater London.
The City has taken measures to reorganize into the primary offshore counting house of China, a reversal of China as the workhouse of the world. China is shifting from investment and capital goods to consumption, and wants the renminbi to become a world reserve currency. The geopolitical turmoil of the incoming multipolar international system is fueling internal populism, “provincialization”, and anti-globalization, fertile ground to begin the “internationalization” of the renminbi. And Britain is there to help.
When the Asian Infrastructure Investment Bank was introduced by China, many countries wanted to join, and though the administration of US president Barack Obama publicly declared membership in the AIIB heresy to American friendship, many did. Most telling was the British defying Obama’s edict and joining. Then in April 2014, when Chinese President Xi Jinping sipped tea with the British Queen Elizabeth II, trade parties signed an important agreement to allow Britain to clear and settle renminbi transactions.
The deal facilitated the use of the renminbi by banks and other companies conducting international transactions, as more than 60% of renminbi payments outside China are made in London, because London is the financial center that can trade with all time zones. Prior to this event, the Bank of England became the first central bank in Europe to establish a currency-swap facility with the People’s Bank of China, supporting renminbi traders by providing funding when needed. The City wanted to be the pioneering force in this “internationalization” of the yuan, as did Germany’s Bundesbank. It signed a similar agreement after meetings in Berlin between Xi and German Chancellor Angela Merkel just before the British did.
Since these banking agreements were signed, the Chinese renminbi has been added to the International Monetary Fund reserve basket that includes the US dollar, the euro, the British pound and the Japanese yen to create a de facto world money known as the Special Drawing Right (SDR). The IMF allowed this political move to occur, waiving criteria, to enlist Chinese voting power and liquidity for a future financial crash.
This buoyed the renminbi, which could credibly challenge the US dollar to become the world’s reserve currency in the future, but not in the short term, as there are problems. The main challenge is the free purchase and selling of renminbi. It is a blocked currency. Trade flows are what will change that, trade flows and the “internationalization” of the renminbi by the City of London.
A historical comparison can be drawn with Genoa, and its oligarchical class who would hold the gold of the Spanish Empire, Europe’s mighty power at the time. Genoa would market the treasure of far-off nations plundered by the Spanish. It grew rich from such an affiliation.
So why is London in a unique position to emerge in a powerful alliance with China?
Napoleon once called Britain the “nation of shopkeepers”, and as a service-based and merchant-experienced country, it has in the City the most “bankster-ridden” finance capitalism of any country in the world. Furthermore, the London Stock Exchange has announced an agreement with the China Foreign Exchange Trade System (CFETS), and has become the primary stock exchange in the world to rate Chinese treasury bonds. This has created a potent environment for the City to transform into a Chinese Trojan horse in the European Union, to the detriment of US supremacy.
The City (under authority of the British Crown and not the EU), a world node for insurance, finance and banking, recognizes that the US will no longer lead a hegemonic world economy. It is becoming a major ally to buoy the Chinese by circumventing the euro and the yen, and usurp the US dollar with the renminbi as the world reserve currency.
In order to have a reserve currency you have to have a market for Treasury bills that is both deep and liquid and that can take in $1 trillion to $2 trillion every day, and return cash into commercial bank accounts – and if there’s a crisis, this system must be able to handle $4 trillion to $5 trillion. The US has that depth, and perhaps Japan. The UK doesn’t have this, but it’s trying to join with China to help Beijing get it and directly benefit from this Sino-Anglo alliance.
However, China doesn’t have a bond market or the needed financial infrastructure yet or enough gold to back up its quantitative-easing policy, but it will, and when it does, how would this long-term alliance benefit Britain?
Continue to part two, online soon.