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China calls for a new International Reserve currency – April fools? I don’t think so
President Obama met with China’s leader, Hu Jintao, (below left) this morning as the Chinese have been making a lot of noise about replacing the US Dollar with a new international currency.
The fact, alone, that they own $1.7 trillion in U.S. dollar based assets has many wondering: is he really serious?
Well, right now, from a financial standpoint, absolutely not. If we said that Jintao’s only concern is money, then I would attribute these statements to a bit of political posturing. With the G20 conference upon us, making this noise puts his face in the forefront of world news and will likely earn him a better seat at the G20 ‘table’. Here is a direct statement from Hu Jintao:
“The world needs to curb trade and investment protectionism and conduct a necessary overhaul of the global monetary system to prevent similar crises from emerging again in the future.”
I understand that in difficult economic times, it is only natural to take tough stances in regards to trade. But at the end of the day, it makes no sense for China to devalue the dollar as they are overexposed to dollar denominated assets.
But is cash the only agenda for Hu Jintao and the Chinese people?
Or, could this come on the heels of mounting political pressure within China? We all know that the Maoists openly admit their desire to see China detached from the United States.
Regardless, from a short term perspective, these threats are merely just that. China is in too deep, currently, to bailout on the dollar. But, long term is another story. For those unaware, China is actively making moves, behind the scenes, to make that transition from the dollar practical, should the dollar continue to drop.
China has been signing currency swaps with other countries, Argentina being the latest, in a move to bypass the dollar as an intermediary and deal with Chinese currency:
“Local media on Monday hailed the recently signed China-Argentina currency swap agreement, insisting that Argentina is able to pay for imported products from China in RMB.
Local media expressed different points of view on the agreements, a report from the daily “Clarin” headlined “China to loan 10 billion USD to BCRA (the Central Bank of Argentina) to calm the dollar,” while the daily “La Nacion” said “Historical agreement with China to eliminate the USD on commercial exchange.”
La Nacion said that the agreement signed in Medellin, Colombia’s second largest city, enabled “Argentina to pay its imported products from China in RMB.”
However, both newspapers mentioned that the Chinese Central Bank has signed similar agreements with emerging economies in Asia like Malaysia, the Republic of Korea, Hong Kong SAR of China, Belarus and Indonesia.” (source)
Here is another link that describes China’s latest currency swaps in more detail.
Bottom line, if China is holding $2 trillion now and Geithner and Obama gets us into hoc a trillion or two more over the next several years, why would the Chinese want to stay in the dollar?
So in summary, short term, China will simply use this as a bargaining tool on trade reform. But, if we don’t address this issue, there is a very strong possibility, if not a guarantee, that China will eventually be able to ditch the dollar. And if that happens, long term growth for the United States will be almost impossible as our recession, as CNBC analyst, Peter Navarro, put it, is “made in China because of things like currency manipulation”.
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China is pursuing an all-to familiar “Heads I Win, Tails you Lose” strategy, and USA Treasury, as yet, has not called them out on it.
The RMB is a controlled/manipulated currency. I’m sitting in Beijing right now. Just try to convert RMB to Dollars or any other currency. You can’t. Against Chinese law. That’s right: against Chinese law.
Try to take or wire RMB out of China and convert it elsewhere in the world. You can’t. Against Chinese law. That’s right: against Chinese law.
Yet the Chinese have the audacity to preach that they should “sit at the table” with the other freely-tradable currencies in the IMF’s SDR basket of currencies. Nonsense.
Why isn’t the USA Treasury making this simple point? This would instantly blunt the ridiculous proposals in this vein coming from China.
Message to China: BE BIG BOYS AND LET YOUR CURRENCY FREELY TRADE LIKE THE US DOLLAR YOU DISPARAGE SO MUCH, AND THE OTHER CURRENCIES FROM THE BIG BOY COUNTRIES AROUND THE WORLD.
Then maybe you have the standing to lecture and make proposals to the rest of the world on currency policy. Then you deserve a seat at the table.
Right now, all you have done is manipulate your way into amassing huge foreign currency reserves by manipulating your too-cheap RMB.
At the same time, this would have the salutary effect of rebalancing trade deficits with China fueled by their manipulated too-cheap currency.
Maybe if enough of us make this point, USA Treasury and the rest of Western Finance Ministries will take up the call and corner China into setting the RMB free.
FREE THE RMB!! That should be our battle cry.
China’s long term strategy calls for China to become a unipolar super-power, with the world following its concept of “socialism with Chinese characteristics”. The “characteristics” are one-party totalitarian rule. By leveraging what amounts to slave wages and slave labor, Chinese has not only become the world’s factory, but China has also managed to steal tens of millions of jobs away from nations that spent a century building up their labor reforms, establishing minimum wage schemes, and making other improvements in the plight of working people.
In the past, the products of companies in Europe or America competed with much cheaper Chinese products. Now, a worker sitting in an office in Boston is competing directly with a worker sitting in an office in China. While the worker in Boston lives in a modern society with all of the freedoms and protections built into the American system, the worker in China has virtually no protections. So now, competition has been redrawn from between products, to between workers. The trouble is, the standard of living in China is abysmal, while the standard of living in developed nations is much better (not just higher, but better).
China, therefore, has been not only exporting its cheap products abroad, but also exporting its rock bottom standard of living abroad. In order to compete with a laborer in China earning $1.00 per hour, that office worker in Boston has to face taking a pay cut of 90% or more. Thank you China for lowering the standard of living for the rest of the world with your socialist totalitarian hellhole.
One can only hope that our new President, Mr. Obama, has the guts to understand China’s true mission (and China suggesting abandoning the dollar is just another step in trying to make China pre-eminent) and ensure that the pressure for China to develop itself into a modern society with all of the trappings of what makes superpowers super (including the notions of freedom and equality which are set forth in the American Constitution, notions which are eschewed by Chinese communists because they are basically cowards hiding behind the idea that democracy won’t work in China — and “won’t work” means “we would never get elected”).
Instead of the crocodile smiles, and awkward handshakes, instead of the blackmail and threats (like threatening to dump two trillion U.S. dollars to send America into a freefall), China should try some reform, beginning first with giving its people the right to hold the government responsible for the dire poverty almost one billion Chinese find themselves in 60 years after the “glorious” revolution.
Obama should realize that while his system of government gives him four years to make a plan, and eight if he’s really good, the Chinese Communist Party thinks in terms of fifty-year and hundred-year plans. Evidence can be found in the slow and deliberate strangulation of the Tibetan people (a plan in effect since 1959), and the kidnapping of its religion (a plan in effect since 1989, courtesy of none other than Hu Jin-tao, who was responsible for the Tibetan region before he ascended to the throne of the Chinese Communist Party), which has required patiently awaiting the death of the Dalai Lama to bring into play.
Quietly amassing two trillion dollars of U.S. Debt is part of a massive plan to give China the power to call shots on American foreign policy. If Obama, disagrees, he can think of what he would like to say, and what he can say because it might upset China.
Now that’s what Obama has to deal with. Let’s see how true Mr. Obama is to his high-minded ideals when it comes to fingering China for the massive human rights violator it is, for the massive aggressor it is, for the interminable genocide in Tibet, the mindless persecution of any group within China that doesn’t sing the Communist anthem, such as the Falun Gong, or Tibetans, or the people of Xin Jiang, or Hong Kong, or Macau. Let’s see if Obama has the courage to protect democratic Taiwan from the scourge of China’s totalitarian dictatorship.
Let’s see if Obama’s campaign rhetoric matches his resolve.
Your move, Mr. President.