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Page added on December 10, 2014
China: Turning away from the dollar
When an economic theme goes global, Hollywood is never far behind. In the futuristic thriller Looper, retired hit man Bruce Willis travels back in time from the year 2074. Upon meeting his younger self, he advises him to stop learning French and instead head to China. In the future, Shanghai is the centre of the world and the renminbi the currency of choice.
While time travel and flying cars may not be on the horizon, at least one aspect appears closer to reality and movie bad guys are not the only ones eager to get their hands on a few “redbacks”. An “age of Chinese capital”, as Deutsche Bank calls it, is dawning, raising the prospect of fundamental changes in the way the world of finance is wired. Not only is capital flowing more freely out of China, the channels and the destinations of that flow are shifting significantly in response to market forces and a master plan in Beijing, several analysts and a senior Chinese official say.
In a nutshell, three big and inter-related changes are under way. China’s appetite for US Treasury bonds, a cornerstone of the global economy for more than a decade, is waning. Beijing is ramping up its overseas development agenda to boost financial returns and serve key geopolitical interests. The promotion of the renminbi as an international currency is gradually liberating Beijing from the dollar zone, providing it with more latitude to open up to foreign portfolio investment flows.
The reorientation of China’s strategy away from Treasuries is a slow-running trend but one which intensified last month after Li Keqiang, the premier, announced a 10-point plan for financial reform. One of the points dealt with the deployment of China’s $3.9tn in foreign currency reserves, chunks of which have been recycled into Treasuries for more than a decade, helping to keep US interest rates low and underpin economic growth in the west. However, the new plan says: “Better use should be made of China’s foreign exchange reserves to support the domestic economy and the development of an overseas market for Chinese high-end equipment and goods.”
A senior Chinese official, who declined to be identified, elaborated on what the plan is likely to mean in practice. “This is a big change and it cannot happen too quickly, but we want to use our reserves more constructively by investing in development projects around the world rather than just reflexively buying US Treasuries,” the official says. “In any case, we usually lose money on Treasuries, so we need to find ways to improve our return on investment,” he says.
Rewiring global finance
Not only is China’s desire to buy US debt diminishing, so is its ability to do so. The banner years of Treasury bond purchases, during which holdings rose 21-fold over a 13-year period to hit $1.27tn by the end of 2013, were driven by an imperative to recycle China’s soaring US dollar current account surpluses.
But these surpluses are narrowing sharply — from the equivalent of 10.3 per cent of gross domestic product at the peak in 2007 to 2.0 per cent in 2013. In fact, if financial flows are taken into account, China ceased over the most recent four quarters to be a net exporter of capital at all.
The impact on Treasury purchases is evident in the tapering of Chinese buying over the past three years. But analysts see structural forces driving a steeper downturn in the future.
“I absolutely think we are going to see smaller Chinese current account surpluses in the future because of greater Chinese spending overseas on tourism and services and greater spending power at home may lead to more imports,” says Jan Dehn, head of emerging market research at the Ashmore fund.
All of this leads to a burning question: how convulsive an impact on US debt financing — and therefore on global interest rates — will the changes under way in China have? Analysts hold views across a spectrum that ranges from those who see an imminent bonfire of US financial complacency to those who see little change and no cause for concern. Occupying a space between these extremes are those, such as Michael Power of Investec, who see potential for a disruptive rewiring of international capital flows, but no certainty that such an outcome will transpire.
“If China starts to pursue investment programmes like developing infrastructure to regenerate the trans-Asian Silk Road, it will no longer be banking most of its surplus savings in US Treasuries,” says Mr Power.
A decade ago Alan Greenspan, the then chairman of the US Federal Reserve, found his attempts to coax US interest rates upwards negated by Beijing parking its surplus savings into Treasuries. Arguably, says Mr Power, a bond bubble has existed ever since.
“If China is now set to redeploy those deposits into capital investment the world over, does this mean the [Greenspan] conundrum will be at last ‘solved’ but at the cost of an imploding Treasury market?” Mr Power asks. “If so, this will raise the corporate cost of capital in the west and put yet another brake on already tepid western GDP growth.”
Stephanie Pomboy, president at Macro Mavens, a US-based economics research consultancy, sees a more present peril. “The conviction that the rest of the world [China and Japan in particular] have no choice but to maintain their attachment to the US dollar is as strong as ever,” she says. “Wallowing in this illusion, investors see no long-term threat to the dollar’s status, even as each day it diminishes in use.”
Locked in
Others, however, say that China is effectively locked into a steady continuation of US Treasury investment because any sudden selldown of its huge holdings could send Treasury prices into a tailspin, thereby slashing the value of Beijing’s position. In addition, says Jonathan Anderson of Emerging Advisors Group, China’s Treasury investments are a byproduct of Beijing’s intervention in currency markets to prevent the type of surge in the renminbi’s value that would have eroded the competitiveness of its exports.
What is clear is that Beijing’s intention to diversify the deployment of its foreign exchange reserves is strengthening. Over the past six months, it has driven the creation of three international institutions dedicated to development finance: the Shanghai-based New Development Bank along with Brazil, Russia, India and South Africa; the Asian Infrastructure Investment Bank and the Silk Road Fund.
Each is likely, or explicitly designated, to receive funding from the foreign currency reserves. Their importance can be judged from their centrality to President Xi Jinping’s aim to realise the “Chinese dream” of recapturing the status the country enjoyed during the most powerful passages in its history, say Chinese officials. The $40bn Silk Road Fund, announced last month, demonstrates Beijing’s ambitions clearly. Set to be funded to the tune of some 65 per cent from the foreign reserves, the fund is charged with achieving Mr Xi’s vision of building a “Silk Road economic belt” across central Asia to Europe and weaving a “21st century maritime Silk Road” through the sea lanes of the South China Sea and the Indian Ocean.
“By building roads and railways over its borders and upgrading ports in Asia, Beijing is tying its neighbours’ prosperity to their relationship with China,” says Tom Miller, senior Asia analyst at Gavekal Dragonomics, a research consultancy. “It is an attempt to restore China’s position at the heart of Asia.”
The infrastructure work will directly benefit the big Chinese construction and equipment companies that are awarded contracts financed by China-backed institutions. This, in turn, should boost the country’s chances of realising Mr Xi’s prediction that Chinese companies will invest some $1.25tn overseas during the next decade.
Renminbi
The launch of these development institutions is only one strand in China’s aim to make finance serve geostrategic goals. An older, but perhaps more important element, is the promotion of the renminbi as an international currency. The drive to internationalise it is derived from a desire to carve out China’s own space within a US-dominated global financial system.
The process accelerated with the outbreak of the global financial crisis in 2008 as policy makers in Beijing realised their economy’s fate was umbilically linked to that of the US.
“We hate you guys”, was how Luo Ping, an official at the China Banking Regulatory Commission vented his frustration in 2009. He and others in China believed that, as the US Federal Reserve printed more money to resuscitate American demand, the value of China’s foreign reserves would plunge.
“Once you start issuing $1tn-$2tn . . . we know the dollar is going to depreciate so we hate you guys — but there is nothing much we can do,” Mr Luo told a New York audience.
In an indication of intent, Wang Qishan, then a vice-premier and now one of Mr Xi’s closest allies in the Politburo Standing Committee, was appointed in 2009 to promote the use of the renminbi in trade settlement and investment around the world. The process is driven mainly by an imperative to decouple China by degrees from its financial reliance on the US and from Washington’s influence over its domestic monetary policy, officials say. As a mechanism towards this end, China is earning a greater proportion of its trade and financial receipts in renminbi. Because these earnings do not have to be recycled into dollar-denominated assets, they can be ploughed back into the domestic economy, thus benefiting Chinese rather than US capital markets.
The renminbi’s progress has been more rapid than many expected. In October, more than 22 per cent of China’s trade was settled in its own currency, according to Standard Chartered, up from almost nothing five years ago. Data from Swift, the international currency clearing system, show it is now the seventh most used currency for payments. Portfolio investors are seeking it out, particularly after the opening last month of the Shanghai-Hong Kong stock connect, an initiative that provides the most unfettered access yet to the Shanghai stock market for foreigners holding offshore renminbi. Western governments are endorsing the currency, with the UK, Australia’s state of New South Wales and the Canadian province of British Columbia issuing renminbi-denominated debt in the past months. Michael de Jong, finance minister of British Columbia, says the debt issue fulfilled several aims, including improving ties with China and attracting financial services from the US.
“I see the full internationalisation of the renminbi as inevitable; it’s a question of when,” adds Mr de Jong.
Such optimism will be welcomed in Beijing as it pursues a master plan to break free of US dominance in global finance and create a parallel, Sino-centric system that takes its cue from a mighty renminbi. Of course, much could yet conspire to blow China’s ambitions off course. But if even half of what it envisages is achieved, the impact on US debt financing, the future of development finance and the opening of Chinese financial markets to international capital would be profound.
17 Comments on "China: Turning away from the dollar"
Davy on Wed, 10th Dec 2014 9:07 am
You may want to read this before you get all warmNfuzzy about this China corn porn.
http://www.zerohedge.com/news/2014-12-09/beijing-we-have-problem
http://www.zerohedge.com/news/2014-12-06/citi-faces-270-million-loss-panic-over-chinese-port-commodity-fraud
Then you need to ask yourself can I trust a country and currency like China’s. Do I ditch one charmin for another? No doubt the dollar is dying and on the way out as the dominant world reserve currency. Yet, if you more than a propaganda bitch you will realize the US is a TBTF part of the global economy with an economy in the top 2 in size. So if you think the US is going to be pushed out of the global game without any consequences or unintended consequences then I will accuse you rightly of lacking background in business, finance, and economics.
From a doomer point of view this diminishment of the dollar and the US economic leadership is a good thing. We are now likely on a bumpy descent. This is a paradigm shift or pole shift. The old is out the new is in. The change is one where the normal or good is now bad and vice versa. Growth is bad for example. If you want to fight the current of descent then practice growth. I am pointing fingers at Asia here because they have an economy and population growing. Descent is going to have new rules to go by to have comparative advantage in the contractions coming in every aspect of man’s life here on earth.
This article is the same garden variety of corn porn promoting and extolling growth and a bright future. The reality is anything but the case. We will likely soon see all the nasty ills that come from contraction and collapse especially from these countries that practice growth at all cost. One such country is China. China is a dead man walking and a hollow dragon.
paulo1 on Wed, 10th Dec 2014 9:18 am
re: “So if you think the US is going to be pushed out of the global game without any consequences or unintended consequences then I will accuse you rightly of lacking background in business, finance, and economics.”
You forgot to add ‘more wars’ to the list, Davy….and ‘lacking a background in history’. I always wonder if isolationism will return, but it seems to be beyond the grasp of current leadership.
Davy on Wed, 10th Dec 2014 9:30 am
Yea, Paulo and the end of BAU and life as we know it.
Kind of a side note but related. Here is a deeper look between the lines of what is really happening in the global economy and why we have little chance of any of this talk we see in this article of becoming reality:
http://www.zerohedge.com/news/2014-12-10/these-are-astonishing-figures-evidence-1930s-style-depression
ghung on Wed, 10th Dec 2014 9:40 am
We’ve seen a lot of posturing between China and Japan over the years, lately over hydro-carbon reserves in the Sea of Japan. If China wants to drop an economic bomb on (very vulnerable) Japan it can start dumping US Treasuries.
Current top 2 holders of US Treasuries:
China: $1.2663 trillion
Japan: $1.2211 trillion
#3 is Belgium at $353.9 billion
JuanP on Wed, 10th Dec 2014 10:43 am
I see these events as a small part of a larger trend. The diminishing dominance of the US dollar as a global reserve and trade currency is a symptom of deglobalization.
As the world deglobalizes, I believe it will first go regional. The world will be divided in two first, then three, plus another ad finitum, eventually ending divided into local tribes and/or small nations?
This will manifest in trade by the development of regional currencies, the Euro being the first to have developed and having taken a large market chunk from the US dollar since its inception. The Renminbi is likely to become or, arguably is becoming the next regional currency, IMO. Gold and/or bartering could be used more, too, as more alternatives to the US dollar, particularly in a world with less trading.
The US dollar is likely to remain as a trading and reserve currency or the foreseeable future, gradually becoming a regional, then national currency, as has been happening for a long time. This is an inevitable consequence of deglobalization and relocalization, and can’t be stopped.
The US government appears to be doing its best, though, to push the rest of the world into accelerating this process by applying unwarranted unlawful economic sanctions at will, and using the US dollar’s dominant position and Western dominated financial institutions as an economic weapon in its futile attempts to achieve global hegemonic dominance. This could accelerate this process significantly, and may bring, on the next decade, all the changes that would have taken a few decades to occur if left alone in peace.
This whole process will have its ups and downs, but these transitions will take a long time to play out. There will be nothing but crises along the way for unrelated issues, as we all here know.
Apneaman on Wed, 10th Dec 2014 1:16 pm
China and India: Accelerating to the Finish Line
http://www.dailyimpact.net/2014/12/10/china-and-india-accelerating-to-the-finish-line/#more-2580
Plantagenet on Wed, 10th Dec 2014 1:46 pm
The US is 17 TRILLION dollars in debt and China has 4 TRILLION dollars of foreign exchange reserves.
China is the strong horse.
Davy on Wed, 10th Dec 2014 3:41 pm
Planter, China has 25 trillion in internal debt. What is that? I believe debt is debt. Someone has to pay someone something someday. OH, I forgot this is the new normal with extend and pretend until you can’t pretend then have your central bank buy up the moldering paper and rinse and repeat. Works great as long as there are suckers out there to participate. I have heard there is a sucker born every single day.
Harquebus on Wed, 10th Dec 2014 5:50 pm
The U.S. just recently reached $18trilling debt. The unfunded liabilities are usually not mentioned are something like five or six times that amount.
The U.S. government is effectively bankrupt and this will have serious implications world wide. When the credit market implodes, the trucks will stop rolling.
Davy on Wed, 10th Dec 2014 6:07 pm
Hark, please tell me a country that is not bankrupt? If there are any countries out there associated with global BAU they are bankrupt. One must at this point go under the surface and explore carrying capacity. On that level Asia is bankrupt and Africa is working on it. The rest of the world has a chance but in trouble.
Makati1 on Wed, 10th Dec 2014 7:40 pm
Plant, Davy is a China hater. The USSA has over $75 trillion in debt to it’s own citizens. China does not have to fund all the welfare, workfare, social security, medicaid, medicare, retirement plans, etc, that the USSA does. Nor is China $18 Trillion in debt.
The article above tells the same story I have been reading for over a year in hundreds of articles from all over the world. It just puts it all together in one place and omits a few facts that would support it’s topic, but it would be too long for the short attention span of most Americans.
China is not stupid. They will spend their USDs as fast as possible without bringing it down to the poor grade of Charmin it really is. As the Chinese official said: “In any case, we usually lose money on Treasuries, so we need to find ways to improve our return on investment,”
I suspect that when the loss become too great, there will be a massive dump of any USD related reserves they have left. We shall see.
Makati1 on Wed, 10th Dec 2014 7:43 pm
Davy, the Philippines is not bankrupt, the last time I checked. It has foreign reserves in balance with it’s national debt (~40%). It has no expensive social obligations to drain it’s coffers.
Makati1 on Wed, 10th Dec 2014 7:52 pm
Harquebus, we have a rabid patriot here that sees nothing negative with his chosen country. Africa and Asia are going to hell and will lead the way, according to him. I guess there are even a few in the UK that still believe England is an Empire. Maybe even some of the Spanish still harbor empirical thoughts. I think the Romans finally got over it.
Oh, he admits that the USSA is not quite perfect, but more perfect than anyone else. Also makes other claims that cannot be backed up as this IS the internet and anyone can be anything, IF they are intelligent enough. I tell it the way I see it and don’t pretend. I don’t have to.
Apneaman on Thu, 11th Dec 2014 8:31 am
China has as many problems as anyone, but the fact remains that many are making plans to cover their ass and get out of the control of U.S. reserve currency. America and many Americans take this as a person insult. Blame of others and violence will be the final result as is always the way with spoiled bully/empires. Washington neo-cons and war hawks (think tanks) have actually been suggesting that the U.S. can win a first strike nuclear war with Russia. They have convinced themselves and are trying to convince others that Russian nuclear and military capabilities are antiquated. Tell yourself. Military, corporate, government and the elites of empire get more delusional and desperate (group think, denial) as the unraveling picks up pace. This is the pattern of empires since the beginning. Overshoot and overreach and always blinded by greed and hubris. I only know of one historical example where an empire (7th century Byzantium) voluntarily contracted to avoid a complete collapse.
Davy on Thu, 11th Dec 2014 8:58 am
Yea App to what? Tell me where it is safe. I see the dollar remaining the safe haven because of a lack of any solid alternatives. Private investors are creature of habit. They are a herd animal and don’t like experimenting. That is for the speculators. The dollar has always been relatively safe. Any turning to other currency has allot to do with smart bilateral trading, the usual carry trade arbitrage, and political maneuvering. These possible alternative reserve currencies have not been shown to be safe havens for the private investor yet. There has been no lift off yet that shows a sustained and significant change
I am not saying the dollar is not under pressure. I am not saying the dollar will not diminish. What I am saying App is what I am telling Mak, your guys want to see one win the other lose and it is not happening. That sucks for a propaganda message theme of that the west is dying and the super hero opponents to the west on the rise.
The whole friggen show is crashing and the propagandist here can’t figure out why their super heroes are falling like flies also. This fantasy is showing wear from the bright light of reality of an interconnected global system where there is no financial alternative nor plan B’s.
Didn’t you read this about China and Russia? We know what is happening to the rubble. Why are so many Chinese oligarch sending their wealth to the US? Why is all that Russian capital abroad not returning? Money walking sends a powerful message. App, please answer this inconvenient questions?
http://www.zerohedge.com/news/2014-12-09/beijing-we-have-problem
http://www.zerohedge.com/news/2014-12-10/pimping-passports-chinese-capital-americas-ingenious-ploy-raise-capex-chinas-oligrac
http://www.bloomberg.com/news/2014-12-11/russia-raises-rates-to-end-ruble-run-as-rout-ravages-economy-1-.html
Apneaman on Thu, 11th Dec 2014 5:21 pm
Gotta be careful with that zerohedge. Who are they owned by, by the way. What’s with the Durdan’s? Big grain of salt there imo. Davy, once A fucking gain, just because I think Russia and/or China are not pushovers or all evil does not mean I am a fan. You still don’t get that, as an American your the one who has been propagandized since birth to a degree never before seen in human history (or possible without mass media) You have what is referred to as a “Manichean world-view” the majority of Americans do. It’s not exclusive to Americans, it’s a feature of all empires. It has simply been practiced, refined and maximized throughout U.S. history. Especially since WWII. You may consider yourself “fair and balanced” but your angry defense betrays you.
1. There are “good people” and “bad people.”
People can be divided into two general camps, “good” and “bad.” “Good” means: anyone who is on our side. “Bad” means: anyone who is against our side. There is zero consideration of morality whatsoever in those evaluations, as they denote one’s faction exclusively. “We” (the side with which the person is assumed to identify) are never “bad.”
https://francoistremblay.wordpress.com/2007/11/16/the-manichean-worldview/
Davy on Thu, 11th Dec 2014 6:02 pm
App, your insistence on only criticizing the US in every way possible is a dead give-A-way for a propagandist with an agenda.
I am apolitical and fascinated by world culture. My daughter has been raised Spanish. My wife-to-be is Italian from the Dolomites. I lived and worked in Germany and Spain. I have been to nearly every country in Europe. I have been to many countries in Central and South America. I am competent with world history, culture, and geography.
Parts of the American culture you despise I despise so no argument there. IMA with similar culture in Canada you don’t complain about. I am not into flag waiving. I don’t hate other countries and cultures. If I put one down almost always it is in response to unfair, unbalanced hate propaganda from folks like you and Mak against the US.
What I feel I am is fair and balanced in my orientation. I am concerned with the truth and attempt to get closer to it. I know I am affected by being American and living in America. Are you telling me you are not conditioned this way also in Canada? You are concerned with an anti-American agenda. You are obsessed with US criticism. I read in your comments few if any other country or cultures are criticized by you. I hear constantly from you how other country or culture criticism is unimportant because the US is so bad.
You are not going to cover the cat piss smell that propaganda carries so cheaply. It is a stink that is always there even when you try the bleach of justification on it. Propaganda is truth distortion for selfish purposes. It is fundamentally the using of facts to make lies.