In the recent months a lot of interesting things happened in China. Everyone heard about economic slowdown of the Red Dragon, burst bubble in a stock market and mushrooming debt after state interventions. What we haven’t heard a lot about is great deal of success and development Xi Jinping’s government accomplished.
Spreading CNY in Europe
China issues first bonds in yuan (RMB) in London. They aim to get 5 billion RMB. Their yield is at 3,1% which means they are a lot higher in this regard than any European country. After a decade of policy of depreciation, USD reserves started to shrink. Making yuan used more often will balance this outflow of capital.
Bonds will be issued in London. UK seeks to repair economic relation with China following example of Germany, France and others who already started some level of financial cooperation with Asia’s tiger. First RMB clearing hub outside Asia opened in Frankfurt. French companies’ spend already 25% of the overall trade in this currency. China is decisive and firm in its push towards Western world. The goal is to loosen the grip of the US in Europe and prepare Europe for the new Silk Road.
Switzerland doesn’t want to fall behind and its opening new finance centre using Chinese currency in Zurich (after Frankfurt, London, Luxemburg). Internationalising yuan is done at the expense of dollar. Chinese renminbi already took over Japanese yen in the amount of trade done in this currency. It is responsible for 2,79% of global trade.
This game is not only about money. Future abilities to capitalise through trade contacts and possible profits are valuable. It will be harder to push Europe against China in a form of conflict, sanctions (etc) if exchange of those regions will be growing.
Fast and steady towards the SDR
Another step for China is to add their currency to the SDR basket. Estimates says that demand for Chinese bonds will increase by 1 trillion USD after yuan will be included. Earlier this year the IMF officials met but again it was ‘too soon’ yuan to join four other currencies of SDR. Next year China will see another chance and while understanding global economy agreed to play in hand of the IMF. Xi Jinping agreed to buy 300 Boeings from the US. This is the biggest purchase of this kind in history. This bribe on one hand changes capital structure of Chinese reserves and on other should seal the deal for RMB to land in SDR.
Why is that so important? China became ‘victim’ of its own success. Their surplus in international trade and 4 trillion USD of reserves is double edged sword. Asian powerhouse wants to dethrone the USD (as dollar has the biggest share in the SDR) but its reserves makes any depreciation of dollar very painful for them. Reserves of those size cannot be spent in Walmart nor can you invest all that in real estate. On top of that you import inflation of currency you hold which makes only sitting on such stash a bad choice.
High level transaction of 300 planes and internationalising yuan can change the game. Spending reserved dollars can export inflation back to the US. Americans will think again about their defensive position against yuan. Classic ‘win-win’ trade for both sides at least in short-term.
Adding yuan to SDR will increase trust of investors from all over the world to currency printed by the PBC (the Peoples Bank of China). Let’s not kid ourselves, Boeings are not the last word from Chinese to makes sure they achieve what they want. China is introducing a SDDS (Special Data Dissemination Standards). The SDDS is standard in which financial data is provided to the public. Before that China was using another IMF standard – a GDDS (General Data Dissemination System). Previous system was said not to be transparent enough. How much of it is a lie? Is publishing financial data now is of some crucial significance? Time will tell.
Destruction of petrodollar
The toughest punch China can now serve is to use yuan to buy oil from Middle East. Beijing is risking quite a lot. Gaddafi and Hussein paid price in head after trying to get rid of the United States Dollar from oil transactions. What we see now is just pre-game.
Long-term goal of pushing the US from the Middle East is far reaching but is not the only one. Military build-up of Chinese bases around Arab Sea and either cooperation or toppling Arabian leaders is another high reaching goal. Steps are already under way to do this. Iran is recruiting and training mercenaries for this purpose. Saudi Arabia’s situation will worsen with time. Washington invests heavily in infrastructure on Pacific and with recent Arab Spring they want to cool down temperature around Middle Eastern conflicts. At least for some time.
Next, Russia is entering the picture. Putin already put a boot to CIA sponsored rebels’ face. Curious coalition has formed: Syria, Iraq and Iran. Pentagon sees this deteriorating situation and considers another military intervention in Syria and Iraq (spending another trillion dollars). Meanwhile, China gets more time to strengthen its position.
International payment system CIPS
CIPS (China International Payment System) is an Asian answer to sanctions and a SWIFT clone. Beijing understood the lesson of Iran in 2012. The easiest way to kill trade is to cut international financial transactions.
Having your own payment system and financial centres in Europe, China is going independent from the US. Technically it is possible to marginalise America and Europe with no bullet… take down an empire. The fundamental, game-changing situation after the CIPS goes online is recent explosions in China. One detonation happened right in front of the building where a supercomputer is serving new system. Important tool such as this one should be better secured. This is why the new NSA centre is few levels underground. Detonation that could threaten this system is a serious move and no coincidence.
How do we know it was the US? Similar explosions happened in Texas right after the state government requested return of gold deposited in the FED. Suddenly separatist movements showed clearly how they don’t like federal government. There are plenty of reasons to give a warning to any non-conformists.
China methodically push forward. Gaining new ground in many areas and developing their financial system offering an alternative to USA-organised and megabanks-driven world. No one expects the US to just sit and wait. Counterattack is called TTIP and TIP. Both aim at cementing position of western corporations and USD in Europe and Asia. Diplomatic and trade war is only beginning. The conflict of world proportions is showing on the horizon. From four mysterious explosions in just a month to buffer conflicts with use of mercenaries.
For now war is being avoided. Let’s just remember that falling empires never end their era in peaceful way. This dethroning is coupled with chaos, armed conflicts and changing of proprietorship structure. Starting from individuals and ending on nations. Preparing for such transformation should be the key point of years to come.
Independent Trader Team