Michael Snyder's Publication
We quote: “China blew up a real bomb, but the mainstream media in the US almost completely ignored this. The Central Bank of China has decided that "the accumulation of foreign currency no longer meets the interests of China." The article by Michael Snyder predicts the serious consequences of this decision for the United States. According to Snyder, this is a “bomb” that, if it does not destroy America, it will cause enormous damage to it. Is everything as it is claimed by the American analyst?
The “explosion” of the “bomb” itself, according to Snyder, occurred on November 20. Made his deputy chairman of the People’s Bank of China, speaking at an economic forum at Tsinghua University. "China no longer prefers an increase in foreign exchange reserves," - quoted by the official news agency Bloomberg. According to him, strengthening the yuan brings people of China more good than harm.
It is strange that Snyder, an experienced blogger (The Economic Collapse blog) and a subtle analyst, was so emotional about the official’s statement. In our opinion, there is nothing particularly sensational in his words.
First, statements of this kind (always - in a very careful form) were made in China before, but they did not lead to anything. Since the end of 1970's. China's foreign exchange reserves grew steadily. It is possible to count short periods (months, sometimes quarters) on hand, during which the accumulation of currency was suspended.
Secondly, the last statement sounds very vague. Nothing, for example, says about the time from which the Central Bank of China will stop buying foreign currency. Yes, and the phrase "China no longer prefers to increase foreign exchange reserves" seems deliberately florid.
Thirdly, if the central banks and treasuries of one or another country stop buying US treasury securities and even reduce the reserves of the US currency, they usually do not state this publicly. For example, the Bank of Russia for the period from the end of January 2013 to the end of July reduced the volume of US Treasury stocks from $ 164,4 billion to $ 131,6 billion, that is, in six months it reduced its portfolio of US treasury bonds to $ 32,8 billion. or on 20%. And did it, mind you, without any fuss.
China in the iron arms of the dollar
The fact that the huge and ever-growing foreign exchange reserves have become a headache for the leadership of the Central Bank and the Chinese government cannot be said much. According to estimates by the Bloomberg agency, over the period from the end of 2004 to the end of 2012, China's foreign exchange reserves increased by 721% and reached 3,3 trillion. If at the end of 2004, China accounted for 14% of world gold reserves, by the end of 2012, this figure increased to 30,2%. According to agency estimates, at the end of 2012, the US currency in the gold reserves accounted for more than 2 trillion. Doll.
At the end of the third quarter of 2013, they already amounted to 3,66 trillion. dollars, which exceeds the annual GDP of a country like Germany. China does not disclose the structure of its international reserves by type of currency. However, from time to time, the People’s Bank of China organizes “leaks” of information on this issue. This information first appeared in September 2010. The official economic publication China Securities Journal reported that as of the middle of 2010, two thirds of reserves (65%) were placed in US dollars, 26% in euro, 5% in pounds sterling and 3% in Japanese yen. Later, expert assessments appeared, according to which the share of US currency in China’s reserves is approximately at the level of 2010 of the year. At the same time, representatives of the European Central Bank (ECB) recognized that the share of the euro in China’s international reserves is extremely small. It should be borne in mind that today the People’s Bank of China has concluded agreements on currency swaps (exchange of national currency units) with about 20 countries. And the currencies of these countries are represented in the reserves of the NBK.
The dollar has been and remains the main currency in China’s international reserves. The United States is China’s main trading partner, all Sino-US trade is conducted in dollars. Since China has a steadily positive balance in trade with the United States, there is a continuous accumulation of the American currency in the gold reserves of the PRC.
China's dollar reserves are nothing more than US Treasury notes that are extremely difficult to “merge.” China is trying to do this by directing part of its reserves to special (sovereign) funds, which can place currency not only in treasury securities and on bank deposits, but also in stocks and shares of foreign enterprises in the real sector of the economy. However, the United States and other Western countries in every way impede such investments, impose various restrictions and prohibitions on investments by sovereign funds under the pretext of “protecting national security”. There are suspicions that China is trying to convert some of its international currency reserves into gold and that the reserves of gold in the reserves are not 1 thousand tons (official data of China), but several times more. At the same time, the overwhelming part of China’s foreign exchange dollar reserves does not work, or rather, it works, but in the interests not of China, but of America, which receives practically free loans from the Middle Kingdom.
About some "mines" of Chinese production
If we even talk about the "bombs" that China blew up or prepared for an explosion as part of its confrontation with the United States, then this, of course, is not a statement by the Deputy Chairman of the Central Bank of China dated November 20. This statement can be compared with the explosion of a firecracker. However, there have been quite a few “bombs” over the past three years. They have not yet exploded, but sooner or later they will explode. It is more correct to call them time bomb. Here are some of them:
1. The decision of the People’s Bank of China, adopted in the summer of 2010, to return the “floating regulated rate” regime of the yuan.
2. The adoption in 2011 of the next, 12-th five-year plan for the social and economic development of China. It sets forth the task of making the yuan an international currency. True, a detailed decoding of what should be understood by the status of "international currency" and algorithms for solving this problem is not contained in the plan.
3. Reaching China with a number of countries of agreements on the transition to the use of national currencies in mutual trade. Among them, the agreement of China with Japan, providing for the use of only the yuan and the yen in mutual settlements, should be especially emphasized. From other currencies (including the US dollar) the parties refuse. There is an agreement on the mutual use of national currencies in settlements between China and Russia.
4. The People’s Bank of China has concluded agreements with central banks of a number of countries (about 20 in total) on currency swaps, i.e. exchange of national currency to facilitate mutual settlements without the use of the US dollar.
5. Achievement at the end of 2011 - the beginning of 2012. the agreement between China and Iran on payments for oil supplied to China, in RMB. A parallel agreement with Russia that such calculations will be carried out with the mediation of Russian banks.
6. Appeal of 6 in September 2012 of Beijing to all countries - suppliers of oil to China with a proposal to carry out calculations for oil in yuan (the main suppliers of oil to China are Saudi Arabia, Iran, Venezuela, Angola, Russia, Oman, Sudan).
7. The statement of the Central Bank of Australia that it plans to convert 5% of its international reserves into Chinese treasury bonds (this was preceded by Chinese-Australian negotiations).
8. The agreement reached in October 2013 between Beijing and London that the London exchange will begin currency trading of the yuan - pound sterling, as well as the permission of the British authorities to Chinese banks to open their branches in the City of London. British-Chinese agreements actually provide for the transformation of London into a kind of offshore Chinese banks and financial companies. Earlier, similar agreements were concluded by China with Hong Kong, Singapore, and Taiwan.
9. In November 2013 was announced by the President of the Shanghai Futures Exchange to launch a new financial instrument - a futures oil contract denominated in RMB. It is assumed that this tool will circulate in the East Asian region.
10. A closed plenum of the CPC Central Committee in November 2013, which discussed China’s plan for social and economic reforms for the period to 2020. The final document published after the plenary session states that one of the priorities of China’s economic policy is to turn the yuan into an international currency. An important means of achieving this goal is the earliest possible transition to full currency convertibility of the yuan.
Each of the above steps is indeed a time bomb. The explosions of these “mines” can change the world beyond recognition. Each of these steps deserves a separate analysis. Here, for example, Beijing’s appeal to oil suppliers with a proposal to proceed to calculations in yuan, made by 6 of September of 2012. Lindsay Williams, who disclosed this secret information, called it a sensation of the XXI century. In his opinion, 6 of September 2012 of the year can be interpreted as the date of China’s “nuclear strike” on America and the Federal Reserve, as the “beginning of the end” of the petrodollar standard that existed for almost 40 years. Of course, L. Williams, like Michael Snyder, creates an artificial sensation effect. Of course, no “nuclear strike” on America and the Federal Reserve 6 of September 2012 was applied. Just another time bomb was laid.
All the above steps are aimed, on the one hand, at releasing China from the iron embrace of the American dollar, on the other - at turning the yuan into an international currency. True, in the Chinese leadership there are big differences on how to achieve these goals and what is meant by the "international" yuan. It was for this reason that it was decided to make the last plenum of the CPC Central Committee closed. Judging by a number of signs, there was a very heated discussion and the struggle between “marketers” and “statesmen” continued. "Market leaders" slowly but surely drag the rope in their direction, although the "statesmen" do not add up weapons. The wording of the final document is rather blurred, however it is difficult not to notice a tendency towards further liberalization of China’s economic policy.
The logic of the Chinese liberals
Let's return to the statement of the Deputy Chairman of the People’s Bank of China on 20 in November of this year. Its meaning becomes clearer if we compare it with a statement that a few days before this was made by the NBK Chairman Zhou Xiaochuan. He said that the Central Bank "basically" abandons foreign exchange intervention. Such statements were not made by officials of the Central Bank of China from the moment when the fixed exchange rate of the yuan was canceled. Let me remind you that before 2005, the yuan had a fixed rate against the US dollar and other freely convertible currencies. At the same time, the course was clearly underestimated, which stimulated the export of Chinese goods to the world market, including the United States. It was the undervalued yuan that became an important reason for China’s victorious march through the world; it generated an active balance of the country's trade and payments balance. Under pressure from the United States and other competing countries, Beijing was forced to abandon the fixed exchange rate of the yuan and switched to the regime of the so-called floating regulated rate of the national currency. First of all, this regime stipulated that fluctuations in the exchange rate of the yuan should be minimal (so as not to disorganize national production and trade). Secondly, the yuan should still be a “cheap” currency. And this requires the so-called foreign exchange intervention. By them is meant the banal purchase of “green paper” by the Central Bank of China, i.e. creation of artificially high demand for US currency. Hence, the overvalued dollar and the undervalued yuan. However, the central banks of all countries of the periphery of world capitalism do this.
The logic of the Chinese liberals is very simple: China does not need a stable and “cheap” yuan. It costs the country too much, because have to deal with the constant buying up of US currency and the accumulation of reserves. Absolutely "free" yuan does not require large reserves. Thus, the country's leadership will disappear headache, which tormented him for many years. And the liberals would like to put an end to this.
Possible consequences of the "liberation" of the yuan
We will not put an end to where Chinese liberals would like to do, but continue to look at the chain of causal relationships:
1. The “free” yuan will begin its rapid rise, from the “cheap” it will quickly become “expensive.”
2. An appreciation of the yuan will reduce the international competitiveness of Chinese goods. Quite quickly there will be a reduction in exports, an increase in imports. China's trade surplus from a positive will quickly turn into a negative one.
3. The current tremendous gold and currency reserves of China in a few years become similar to how March snow turns into a wet puddle.
4. Chinese enterprises, deprived of markets, will stop, and millions and tens of millions of workers will be on the street. The real economy will begin to degrade rapidly.
5. In order to prevent the bankruptcy of enterprises, and the state to import vital goods, China will have to resort to the help of foreign lenders and investors.
6. Such "help" will be willingly provided by the West. As a result, the assets of the Chinese economy will pass into the hands of transnational corporations, and in terms of the level of foreign government debt, China will look worse than today's Greece.
7. China, after dismantling foreign exchange regulation on capital transactions, can be completely unprotected against the impact of global financial crises. Speculators like Soros can start playing short of the yuan. China may need foreign exchange reserves to counter financial speculators, but they will not.
8. The yuan will very quickly become a weak currency, losing even some of the signs of the “international currency” that it has now, in the 2013 year. Moreover, such a weakness of the yuan will not greatly depend on whether the dollar retains its position or not. The yuan will be weak relative to the currencies of those countries that will keep the real economy.
Japan's sad experience
Here you can recall the sad fate of Japan, which two decades ago seriously thought that the yen could become equal to the US dollar or even replace it. By the way, in many of the relative economic indicators, then Japan looked even better than today's China. Today, Japan is still in the "seven" of the leading economically developed countries of the world, but already on the sidelines.
Let us return once more to the final document of the last plenum of the CPC Central Committee. It emphasizes the need for the speedy monetary liberalization of China’s capital operations. Simply put, Chinese and foreign investors in order to conduct cross-border operations (export and import of capital) should not have any difficulty converting the yuan into foreign currencies, as well as foreign currencies into the yuan.
Why such a rush? Apparently, the Chinese liberals are counting a chess game for more than one move. They are aware that in the event of a liberal exchange rate of the yuan, the country will very quickly lose export earnings, with all the ensuing consequences. They are aware and expect that export earnings will be replaced by money from foreign investors. The latter, of course, need full conversion of the yuan - not only to invest their dollars and euros in the Chinese economy, but also to easily withdraw investment income in the same dollars and euros from the country. However, the task of replacing export earnings with foreign investment is extremely difficult. Suffice it to say that in 2012, revenues from Chinese exports amounted to about 2 trillion. dollars, and the inflow of foreign direct investment in the Chinese economy - only 120 billion dollars. No currency liberalization is not able to provide full replacement. At least for the reason that there is no such volume of direct international investment in the world. In the same 2012, direct cross-border investment amounted to only 1,3 trillion in aggregate. Doll.
As world experience shows, the complete liberalization of capital operations in the periphery of world capitalism usually leads to the fact that not strategic investors rush into the country, but speculators with their hot money. Such "investors" do not develop the economy, but gnaw its assets and destabilize the work of the surviving enterprises. Full liberalization of capital operations, carried out at the end of 1980-x - the beginning of 1990-x. in a number of ASEAN countries, then called the "Asian tigers", led to the fact that these "tigers" began to turn into pathetic cats. The full fruits of the liberalization of capital movements were manifested during the financial crisis in Southeast Asia in 1998. It caused incalculable damage to the economies of the former "tigers" ...
At the November plenum of the CPC Central Committee, emphasis was placed on enhancing the export of capital from China. To increase the efficiency of such export, we really need a strong yuan. After the cancellation of the regime of the regulated exchange rate of the yuan, the rate of the Chinese monetary unit will go up for a while. I do not know how long such a rise will continue. Maybe a year or two, but hardly more. During this time, capital should be withdrawn from China and placed in financial and non-financial assets of other countries. It seems that the Chinese liberals are preparing to escape capital (and at the same time theirs themselves) from the country of "victorious socialism." A high-minded talk about the yuan as an "international currency" and about currency liberalization, Chinese liberal officials need only to escape from the country. By the way, according to the data of the international public organization Global Financial Integrity (GFI), for the first ten years of the 21st century, capitals worth 2,74 trillion were illegally exported from China. dollars Only in 2010, the illegal export of capital amounted to 420 billion dollars, which is approximately equal to ¼ of the total export earnings of China in the same year. The withdrawal of capital from China is fraught with risks for its organizers and beneficiaries (corrupt officials and related businessmen). It is these shadow capital exporters who primarily lobby for the rapid abolition of any restrictions on the export of capital, the conversion of the yuan and its transformation into a “strong” currency.
On the fears of Michael Snyder
Once again, back to the article by Michael Snyder. He is American. Therefore, he is most concerned about the consequences of the cessation of further accumulation of dollars by the People’s Bank of China for America. In his opinion, the brunt of the Chinese "bomb" will fall on the United States. America has not had time to recover from the events in October of this year. Let me remind you that budget financing was suspended in the country, since the US Congress did not adopt the federal budget for the next financial year. And it was not adopted first of all because the state has exhausted the limit of borrowing. The October events showed how unstable the well-being of a well-fed America. It depends on countries like China that regularly buy US Treasury bonds. On October of this year. every tenth dollar of such bond borrowing was from China. To lose all borrowing for America to 1 / 10 is very sensitive. In addition, China may be followed by other "donors" Uncle Sam. Depriving the US treasury of food from China could lead to a sharp increase in interest rates on US government bonds, which would entail a lot of trouble for the US economy. For example, a significant increase in the share of so-called interest expenses (expenditures on servicing the public debt) in the federal budget. The rise in price of credits and loans will also become inevitable, which will put an end to the goals of restoring the American economy proclaimed under the program of “quantitative easing”.
Yes, Michael Snyder and other Americans have something to worry about. However, China today can no longer be regarded as the main cause of America’s troubles. The fact is that since September last year, the US Federal Reserve has launched the third program of “quantitative easing” (CU). Its official goal is to rebuild the American economy, hit by the financial crisis and reduce unemployment to safe levels. To do this, every month the Fed casts 85 billion dollars into the financial and banking sector through buying out mortgage-backed securities (for 40 billion dollars) and US treasury bonds (for 45 billion) in the secondary market from US banks. "Quantitative easing" led to the fact that the Federal Reserve was the main buyer of treasury securities in the last year. Foreign central banks and other buyers had very little. Why in the last year such a sharp turn was made in the direction of the Fed is difficult to say now. Maybe because Washington decided to insure against possible boycotts from the Central Bank of other countries. It follows: even if the statement of a high-ranking official of the People’s Bank of China on November 20 will be implemented, i.e. The Central Bank of China will stop completely buying American securities, and America’s immediate collapse will not happen. The collapse of America can happen, but for another reason - because the Federal Reserve will not be able to withstand the overloads caused by the need to buy huge amounts of US Treasury bonds.
Hard times are waiting for China
But for China, stopping the accumulation of dollars is suicidal. The Chinese economy is like an airplane that has been circling for a long time in the air, because the pilot does not see a convenient platform on which to land. Fuel is running out, and there is a danger that the plane will crash to the ground. Decisions on stopping the accumulation of dollars to Beijing could be made only if he had a spare airfield on which to land a plane called the Chinese economy. Under this "airfield" should be understood the domestic market of the Middle Kingdom. The Chinese leadership has long realized this and in the past decade has made weak attempts to reorient industry and other sectors of the economy to meet domestic demand and create a single national economic complex. However, the country continued to move along the track, into which it was still at the end of the 70's - the beginning of the 80's. the last century tightened the West. The country could not go on the rails of independent economic development. China has neither had a domestic market, nor has it, and therefore it is so dependent on foreign markets and the US dollar.
Apparently, at the November (2013) plenary session of the CPC Central Committee, the plans to reorient the Chinese economy to the domestic market were put to the cross. The Chinese leadership has decided to continue the course towards further integration of China into the global economy, but the nature of this integration is changing before our very eyes. Since Deng Xiaoping, for three decades, China has been conquering global commodity markets. The country has become a "world workshop", serving half the world. China revealed a dependent type of industrial capitalism, which retained socialist rhetoric. By "socialism" in China is meant the eastern form of state capitalism. After the global financial crisis, from about the 2010 year, an unpleasant thing for Beijing was fully revealed: China’s extensive exploration of world commodity markets has been exhausted. A slowdown in the economic development of the Middle Kingdom began, not yet catastrophic, but alarming. In 2010-2011 The Chinese party-state leadership conducted a painful search for a way out of the emerging deadlock. The 12 five-year plan, adopted in 2011, implicitly reflected the adjustment of the country's economic course: an orientation toward the rapid development of the domestic financial market, the gradual opening of this market to the outside world, and the development and conquest of world financial markets. China’s leaders have set about transforming industrial capitalism into financial capitalism.
And financial capitalism has long been established in the countries of the “golden billion”. The West and, above all, the United States do not need a competitor in the form of Chinese financial capitalism. China’s creation of its own internal financial market, the partial internationalization of the yuan, and full monetary and financial liberalization will only accelerate the conquest of the Middle Kingdom by the grants of Western financial capital. It is likely that China will face tough times in the coming years.