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Chinese Global Currency Strategy Challenge to U.S. Dollar and Gold

Currencies / Global Financial System Apr 23, 2009 - 12:10 PM GMT

By: Jim_Willie_CB

In a series of maneuvers, Chinese officials have revealed their strategy implementation in a very broad set of steps. Beijing leaders plan to establish the yuan currency as a global reserve currency. The process will be made more complete after issuance of a large volume of Chinese Govt debt securities, soon in coming. The number of policy actions is impressive. While the USGovt is busy stepping backwards with FASB rules enabling false bank accounting, gearing up Treasury programs to direct colossal elite welfare / confiscation to failed banks responsible for the crisis, covering up Wall Street fraud and regulatory lapses and debt rating agency collusion, and ordering pork like the $9 billion high speed train from Disneyland to Las Vegas, the Chinese are making important meaningful critical strides.

Within a year, the Chinese will have established the yuan currency as a legitimate alternative to the USDollar for global trade, and later to some extent for global banking. The Chinese Govt has ordered monetary policy changes that have boosted their money supply by 25.5% over the last twelve months, with a giant stimulus program and relaxed bank credit rules. Since new maneuvers are being funded by incremental new surplus funds, they are exhibiting their financial power without upsetting their vast reserves accounts. The lost in the USCongress might talk about ‘Pay-Go’ measures to pay for programs as we go forward, but China does it in actual terms.

The Chinese are finally deploying alternative strategic plans in heavy volume, in open defiance, and even finger wagging at USGovt leaders. From their perspective, Beijing suspects that the US Federal Reserve is engineering a covert default on America’s debt by printing money on a vast scale. The Beijing leaders have reacted in a very noticeable profound comprehensive manner that has taken many analysts and observers off guard.

In my view, the Chinese will successfully serve as the spearhead for dethroning the USDollar from its primary global reserve currency position, called by me the catbird seat. The US has become a horrible steward, in recent years promoting massive syndicates that finally are being recognized. Both Bob Moriarity and Gary Dorsch have put forth articles in the last couple weeks pointing out Financial Coup d’Etat events and forces that reveal Obama in service to his Wall Street masters. The Wall Street Journal and London-based journals also have begun to cite endorsed and covered-up failure. This is unprecedented in journalism. After the Chinese spearhead does its work, the new partially gold-backed currencies can more easily be launched. One might say that Beijing leaders and their cast of economist and banking leaders are tilling the soil for planting the new currencies. At one time, my perception was that the yuan would follow the new hard asset launched currencies, linking to them with basket weightings. Now it is quite clear that China will lead and others will follow, benefiting from the heavy spadework, after dealing with geopolitical headwinds and interference.

SPECIFIC CHINESE STEPS TOWARD GLOBAL POSITION

The April Hat Trick Letter report for Gold & Currencies has been posted. Here are some outlined details on the important maneuvers recently made by China. They appear to be positioning themselves both to establish the yuan across the world and to fortify reserves with hard assets. Their steps are broad and effective upon examination. Their initiatives display coordination, planning, and research. Next they must deal with political backlash, unintended consequences, internal social problems, and hidden retaliation that will not be discussed (much precedent).

Since last December, China has signed deals with six countries, including Indonesia, South Korea, Hong Kong, Malaysia, Belarus, and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to pay for goods they import from China in yuan, bypassing the USDollar. This is an international settlement function.

Beijing is taking initiatives to use the yuan to settle trade accounts between some Chinese provinces and neighboring states, starting with Hong Kong. Shanghai and the four cities Guangzhou, Shenzhen, Dongguan and Zhuhai have been designated to use the yuan in overseas trade settlements, ordered by a State Council under the auspices of Premier Wen Jiabao. This Pearl River Delta region is the location of the biggest concentration of export oriented factories. The motive is to reduce the risk from exchange rate fluctuations, and to encourage their overseas trade in decline.

Chinese officials have called attention to the risks of an international monetary system that relies on the USDollar, seen as increasingly unstable and subject to further indirect devaluation. A broad campaign has been underway for a couple months that seems coordinated, with participation by many bank and economic leaders.

A plan to set up a $10 billion cooperation fund to support infrastructure projects in countries in the Assn of Southeast Asian Nations (ASEAN) has been hatched. The plan was announced earlier this month by Chinese Foreign Minister Yang Jiechi. The ASEAN member countries are Thailand, Malaysia, the Philippines, Singapore, Brunei, Vietnam, and Indonesia. The fund could morph into a regional development fund.

The Chinese have made gigantic purchases recently for soybeans, copper, iron, crude oil, and more. The Chinese companies have begun in earnest to scoop up raw materials at cheap prices. Also, Chinese companies invested $16.3 billion in foreign assets during January and February, a doubled tempo from last year. Target zones include Iran, Brazil, Russia, Venezuela, and Australia.

Ambrose Evans-Pritchard points out that Beijing might someday purchase buy gold on a grand scale. He jests on a copper standard for a global reserve currency, and overlooks that crude oil will also figure into the Chinese commodity formulas. Interpret these developments as a major initiative toward a hard asset currency positioning for the Chinese yuan. Ambrose said, “The beauty of recycling China’s surplus into metals instead of US bonds is that it kills so many birds with one stone:

1. it stops the yuan rising, without provoking complaints of currency manipulation by Washington;
2. metals are easily stored in warehouses, unlike oil;
3. the holdings are likely to rise in value over time since the earth’s crust is gradually depleting its accessible ores;
4. Above all, such a policy safeguards China’s industrial revolution, while the West may one day face a supply crisis.

 GOLD REFLECTS USDOLLAR INSTABILITY

The gold cartel is gradually losing control. They can put out a ‘double down’ futures contract short attack. They can reduce gold lease rates to below zero. They can avert a COMEX default at the eleventh hour. The consolidation process continues with a carving of the right side handle to the Cup & Handle reversal pattern in the gold price chart, as patience is surely tested. Support has been good at the more stable 50-week moving average, aided by the May 2008 support, both at the 860-865 level. Today on Thursday, the gold price finally jumped over the 900 mark, and even silver enjoyed a big rise of 3%. Currencies are being ruined universally, as governments debauch their supply fundamentals with what they regard as impunity and zero cost, very mistakenly. The costs come later, from price inflation, lost stability in the monetary foundation itself, and new unforeseen bubbles. The gold price target remains 1250 to 1300 once the 1000 mark is cleared. Watch for the potential of a bullish stochastix crossover in the green oval in the next week, an event that technicians would notice. It would signal a substantial move up soon.

Desperate measures like the EuroCB action (d) and surging COMEX open interest (e) are difficult to repeat and to sustain. Exposure renders great harm to the confidence pillar of the major currencies. The extremely promising bullish factors behind gold are many:

1. negative real interest rates
2. shortage of physical gold, whether bars or coins
3. advent of price inflation next year
4. Euro Central Bank rescue to avert COMEX default by Deutsche Bank
5. Surge in Open Interest since mid-March in gold futures contracts
6. Howard Ruff loves silver due to shortages, to restore the gold/silver ratio.

EXPECT THAT THE GOLD PRICE WILL MAKE NEW HIGHS FAR EARLIER THAN THE USDOLLAR SUFFERS EXCHANGE RATE DECLINES ON ANY BROAD BASIS. The Competing Currency War will keep the US$ propped for a while longer, as other currencies falter. However, the uniform competing currency devaluations serve to give gold (and silver) strength. Behind the scenes, some nations are taking stern action to firm their gold positions before the next crises, like this summer and again this autumn. In particular the Germans have ordered the return of all gold bullion home from US shady custodial supervision, while the Arabs are purchasing every available gold bullion ingot from global warehouses in private sales. They want the IMF gold next.

HIDDEN CONFLICT AT THE G20 MEETING

It is my firm belief that the Chinese controlled the G20 Agenda totally, with direct coordination from the Russians, but made gentlemanly agreements not to reveal their control. My firm belief is that the Chinese and Russian leaders at the G20 Meeting in London had contentious private meetings. Premier Wen Jiabao and Dmitri Medvedev probably informed President Obama that the USDollar is dead as a uni-polar global reserve currency, that the Chinese yuan would expand its global function, that the Special Drawing Rights could fill a void until more specific new currencies could be launched in the future, but that the choreographed glitz of the London meeting could proceed on its carefully planned stage. Several nations, led by China and Russia, demand both respect and positions on global banking institutions. China is a major global creditor nation, funding $10.4 million in USGovt debt per second. What an incredible factoid.

The G20 Meeting exposed an important erupting rift with clear divisions having emerged. Three distinct global camps are clearly at work on the monetary stage, led by US-UK, Germany, and Russia-China.

1. The United States and Britain are alone in the monetary desperation camp. The US relies upon unbridled monetary stimulus, fiscal stimulus, employing the familiar type of failed devices that might push the limits on a potential USTreasury Bond default, in response to national insolvency on many fronts. Great Britain stands weakened in the US camp, harmed by big bank failures, a collapse of housing prices, and recently the UK Gilt auction failure.
2. The Europeans (led by Germany & France) object to uncontrolled federal spending. German Finance minister Peer Steinbruck accused the British of ‘Crass Keynesianism.’ The Germans openly oppose larger, broader, and continued stimulus packages. The German Govt will not embark on plans that repeat the mistakes of the past.
3. The Russians and Chinese push hard for a global reserve currency alternative to the USDollar. They permit the IMF device of Special Drawing Rights to serve as a Straw Man. Russian leaders boldly suggested in open court that gold should be included in whatever basket of currencies and commodities supported the new reserve currency.

CHINESE OFFICIALS REVEAL THEIR PHILOSOPHY

The Peoples Bank of China has been outspoken in its call for a new reserve currency. A new figure in international finance must be recognized in Zhou Xiaochuan, governor of the central bank of China. In future years, Zhou could become a very prominent person who is at the forefront to break the USDollar dominance in global finance, with full support from Russia. In a white paper ambitiously entitled “Reform the International Monetary System,” Zhou has called for the creation of an international currency unit that will require ‘extraordinary political vision and courage.’ He suggests an initial launch as a blend of the USDollar, British pound, Japanese yen and the Euro, as a super-sovereign currency. It is essentially the makeup of the so-called Special Drawing Rights (SDR) created by the IMF in 1969, in my view a Straw Man device for transitional purposes.

Zhou has shocked many bank leaders and experts by suggesting that international financial institutions such as the Intl Monetary Fund should manage some the currency reserves of some nations. Again, this is possibly another Straw Man, to take control out of the hands of its current dominant members in the US and UK. Zhou proposed that the IMF be empowered to “act as a super-sovereign reserve currency [and to increase the IMF resources.] The scope of using the SDR should be broadened so as to enable it to fully satisfy the member countries demand for a reserve currency.” This is revolution in global finance.

To date, central banks maintain control over their reserves and secrecy over monetary policy. Zhou stressed that “The centralized management of part of the global reserve by a trustworthy international institution will be more effective in deterring speculation and stabilizing financial markets.” He surely prefers multi-polar management. Zhou went further in a separate address. Secondly, he stressed that “The global financial system relies heavily on the external credit ratings for investment decisions and risk management. [Thus is encouraged] a massive herd behavior at the institutional level. Moreover, the rating models for mortgage related structured products are fundamentally flawed.” Thirdly, Zhou ends with blame of the American fair-value accounting system and especially the mark-to-market model, the foundation of phony valuations. The American style is openly recognized as flawed at best, and corrupt at worst. Zhou has boasted that China has taken far more concrete steps toward viable remedy and meaningful stimulus than the United States.

CREDIT CRISIS AUTOPSY

Here is fine piece of analytic work from a friend named Trace Mayer. He comes to the gold community with a different slant and background. He has a law scholar with emphasis on the Constitution, especially how it applies to the gold and currency topics. In his e-book entitled “The Great Credit Contraction” one can read about the historical significance of a crisis that will surely reshape the world. The global economy is built on an illusion currency that is evaporating before our very eyes. This book is an autopsy of the current worldwide systems and begins with financial history, discusses the current great deflationary credit contraction, projects the future environment, and concludes with suggestions on how to generate and preserve wealth in this challenging time. An appendix analyzes important topics. (CLICK HERE TO ORDER)

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by Jim Willie CB
Editor of the “HAT TRICK LETTER”
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Comments

Aaron 24 Apr 09, 12:56

Walking Billboard Is this guy nothing more than a walking advertisement anymore? Nice work on the Chinese situation, but seriously - lay off the self-serving plugs.