History teaches us that China never had imperialistic ambitions. Policy of strong fist against minorities never translated itself into expansionary mission of achieving hegemony status.

Last 40 years China was developing very fast. Two factors being responsible for that. Cheap labor force open for global transfers of technology and capital flowing mostly from the US.

Transformation form the third world country into second largest economy (behind the US) and first according to purchasing power. Still even with strong economy China was treated like ostracisied causing that needs to do a lot to be accepted by ‘elite group’ that plays first fiddle on the international stage.

Right now 1 out of 6 people lives in China. Country boast the biggest currency reserves worth over 3 trillion USD from which 1,3 trillion are in American bonds. Another 5 trillion USD is in hands of Chinese individuals. China is also a record breaker when it comes to producing, owning (government reserves + society’s property) and importing gold. This will have to do with introduction of gold standard regarding yuan (or future currency).

Through cooperation and trade, this was the way the Middle Kingdom tried to build its global position. Result of that is Shanghai Cooperation Organisation. In the frame of BRICS cooperation foreign policy took more harmonized shape. The last part is about money. Newly established AAIB will be source of funding projects of big scale. Nearly all Asian countries joined the AAIB (apart from Japan) and most European powerhouses.

For years China was a world’s factory. Thanks to tech transfer it is not only manufacturing cheap gadgets but now higher quality, high value added products. Formidable level of exports over imports strengthened yuan. To control yuan better Chinese put big dollars (from exports) in the US government bonds and other assets in USD.

Wind changed three years ago. Goal has been switched from increasing dollar reserves to internationalise yuan. Previously when China wanted to buy coal from Australia they needed to get dollars first. Next they needed to exchange them to AUD and the same way back to CNY. You can imagine transaction costs. To minimise those PBC (China’s central bank) signed swap deals enabling direct exchange of yuan to 30 other currencies. Now significant share of Chinese trade is made in yuan.

Second largest economy in the world, the highest currency reserves and currency quickly gaining global recognition, Chinese started to talk with the IMF about adding CNY to SDR basket. Success would mean focusing investors’ attention and starting to build solid trust all over the world. There is a catch. The United States Dollar may lose veto rights and can be the biggest loser of China’s success.

Everything went smooth and a consensus has been achieved behind closed doors. China did its part by officially announcing their gold reserves at 1650 tons. This move was played in the US’ hands as the market consensus was placing china’s gold reserves at 3500-4000 tons. To show the amount of underestimation here the real reserves may be around 6000-8000 tons. This was the price for being accepted in prestigious clique.

Few days after the gold reserves update, CNY joined USD, EUR, GBP and YEN. It became fifth currency securing futures of the biggest commodity market… and then the storm clouds started gathering.

No positive headlines emerged about the US – China relation. First the rumors about American involvement in China’s stock exchange slump were confirmed. Search ‘Citadel’, new employer of Ben Bernanke you will know more. Chinese returned the favor and blocked Wall Street for few hours and number of American airlines.

Suddenly, two weeks ago we heard that CNY no longer matches the criteria set by the IMF and accession of yuan must be postponed for 9-12 months. Clearly something went wrong at such advanced stage of negotiations.

Once again China retaliated in a way no one expected. Depreciation of yuan with threat of further depreciations. The US accused China of currency manipulation for some time and pushing yuan artificially low hurts American exporters. You can see the pattern here. Blow after blow.

Until now China’s policy was underpinned by calm Sun Tzu strategy – ‘wait until your enemy will weaken himself’. Lately strong USD caused problem in financial system diminishing liquidity. Maybe Asians want to break US economy by strengthening of the dollar? It seems so.

Strong American currency will be the final blow to its already shrinking economy. With USD growing stronger the derivatives bubble can burst and a chain reaction may devastate western banking system. What is happening on ‘high levels’ is extremely hard to read. Nevertheless, in front of our eyes we can see two greatest economies in the world being on collision course with each other.

I cannot see any headlines talking about huge explosion in Chinese harbor. Coincidence? Maybe, but there are a lot of those ‘coincidences’ no one is talking about. Be vigilant.

 

Trader 21