Since 21 November, an article by well-known financial analyst and blogger Michael Snyder under the headline «China announces that it is going to stop stockpiling US dollars» has spread through the media like wildfire. (1)
Michael Snyder’s article
We quote: «China just dropped an absolute bombshell, but it was almost entirely ignored by the mainstream media. The central bank of China has decided that it is ‘no longer in China’s favor to accumulate foreign-exchange reserves’». Michael Snyder’s article predicts that China’s decision will have serious consequences for the United States. According to Snyder, even if this bombshell does not destroy America, it will still cause the country enormous damage. Can it all really be as the American analyst claims?
The bombshell itself, according to Snyder, was dropped on 20 November. It was dropped by a deputy governor at the People’s Bank of China in a speech at an economic forum being held at the Tsinghua University. «It’s no longer in China’s favor to accumulate foreign-exchange reserves», writes Bloomberg, quoting the official’s speech. According to the official, the appreciation of the yuan benefits more people in China than it hurts.
It is curious that Snyder, who is an experienced blogger («The Economic Collapse» blog) and a shrewd analyst, interpreted the official’s statement so emotionally. In our opinion, there is nothing particularly sensational in his words.
Firstly, similar statements have been made in China before (always very cautiously), but they never lead anywhere. At the end of the 1970s, China’s foreign-exchange reserves grew continuously. It is possible to count on the fingers of one hand the short periods of time (months, sometimes quarters) during which China’s accumulation of reserves stopped momentarily.
Secondly, the latest statement sounds really very vague. There is no mention, for example, of when exactly the central bank of China is going to stop buying foreign-exchange reserves. And the phrase itself – «It’s no longer in China’s favor to accumulate foreign-exchange reserves» – seems to be intentionally rhetorical.
Thirdly, if the central banks and treasuries of some country or other stop buying US Treasury securities and even reduce their US currency reserves, they do not usually announce it so loudly. For example, over the period from the end of January 2013 to the end of July, the Bank of Russia reduced its stockpile of US Treasury securities from USD 164.4 billion to USD 131.6 billion, which means that over the course of six months, it reduced its portfolio of US Treasury obligations by USD 32.8 billion, or by 20 percent. And you will notice that it was done without much fuss.
China in the iron embrace of the dollar
There is no need to say that much about the fact that the enormous and constantly growing foreign-exchange reserves were becoming a headache for the central bank’s senior management and the Chinese government. According to the Bloomberg agency’s calculations, over the period from the end of 2004 to the end of 2012, China’s foreign-exchange reserves (FER) grew by 721 percent and reached USD 3.3 trillion. While China’s share of the world’s FER stood at 14 percent at the end of 2004, by the end of 2012 this figure had increased to 30.2 percent. The agency estimates that at the end of 2012, US currency accounted for more than USD 2 trillion of China’s FER.
At the end of the third quarter of 2013, it amounted to USD 3.66 trillion, which exceeds the annual GDP of a country like Germany. China does not disclose the composition of its international reserves by currency. However, from time to time the People’s Bank of China organises a leaking of information on the issue. The first such information appeared in September 2010. The country’s official financial publication, China Securities Journal, reported that as at the middle of 2010, two thirds of its reserves (65 percent) were held in US dollars, 26 percent in euros, 5 percent in pound sterling and 3 percent in Japanese yen. At a later date, expert estimates emerged putting the share of US currency in Chinese reserves at approximately the 2010 level. At the same time, representatives of the European Central Bank (ECB) admitted that the share of the euro in China’s international reserves was extremely small. It should be borne in mind that, to date, the People’s Bank of China has entered into currency swap agreements (the exchange of national currency units) with approximately 20 countries. And the currencies of these countries are in the reserves of the People’s Bank of China.
The dollar was, and still is, the main currency in China’s international reserves. The US is China’s main trading partner, and all Chinese-American trade is conducted in dollars. Since China has a steady surplus in trade with the United States, there has been a continuous accumulation of US currency in China’s foreign-exchange reserves.
China’s dollar currency reserves are no more than US Treasury notes, which are extremely difficult to redeem. China is trying to do it, directing part of its reserves into special (sovereign) funds which can put money into Treasury securities and bank deposits, as well as into the stocks and shares of foreign companies in the real economic sector. The US and other countries in the west, however, are preventing investments like these in every way possible and are introducing various restrictions and prohibitions for sovereign fund investments under the pretext of «protecting national security». There are suspicions that China is trying to convert part of its international foreign exchange reserves into gold, and that these gold reserves do not amount to 1,000 tonnes (China’s official figures), but several times more. Moreover, the overwhelming majority of China’s dollar currency reserves are not serving the interests of China but of America, which receives virtually free credit from China.
On certain «mines» of Chinese manufacturing
If we are talking about the bombshells that China has dropped, or is preparing to drop, as part of its opposition to the United States, then we are not talking about the statement made by a deputy governor of the People’s Bank of China on 20 November this year. This statement could be compared to the explosion of the detonator. There have been quite a number of bombshells over the past three years, however. They have not yet exploded, but sooner or later they are going to explode. It would be more correct to call them delayed-action mines. Here are some of them:
1. The decision taken by the People’s Bank of China in the summer of 2010 to reinstate a «managed float» of the yuan.
2. The approval, in 2011, of the latest 12th Five Year Plan for China’s socio-economic development. The plan poses the problem of making the yuan an international currency, though it does not contain any kind of detailed explanation of what should be understood by the status of «international currency», or any algorithms for solving this problem.
3. The reaching of agreements between China and a number of other countries on a transition to the use of national currencies in mutual trade. Of these, China’s agreement with Japan, which stipulates the use of just the yuan and the yen in mutual payments, is particularly worth pointing out. Those involved are abandoning other currencies (including the US dollar). There is also an agreement on the mutual use of national currencies in payments between China and Russia.
4. The People’s Bank of China has also entered into currency swap agreements – i.e. the exchange of national currency units for the facilitation of mutual payments without using the US dollar – with a number of other countries (nearly 20 in total).
5. The agreement reached between China and Iran at the end of 2011-beginning of 2012 for the payment of oil supplied to China in yuan. There is a parallel agreement with Russia that such payments will be executed with the mediation of Russian banks.
6. Beijing’s appeal on 6 September 2012 to every country that supplies China with oil proposing that oil payments be made in yuan (China’s main oil suppliers are Saudi Arabia, Iran, Venezuela, Angola, Russia, Oman and the Sudan).
7. A statement by the central bank of Australia that it is planning on converting 5 percent of its international reserves into Chinese treasury bonds (this was preceded by talks between China and Australia).
8. The agreement reached in October 2013 between Beijing and London that currency trading between the yuan and pound sterling will begin at the Royal Exchange, as well as the permission given by the British authorities to Chinese banks, allowing them to open up branches in the City of London. The agreement between Britain and China virtually involves London’s transformation into a kind of offshore company for Chinese banks and financial companies. China previously entered into similar agreements with Hong Kong, Singapore and Taiwan.
9. The announcement in November 2013 by the President of the Shanghai Futures Exchange on the launch of a new financial instrument – a crude oil futures contract priced in yuan. It is assumed that this instrument will be used in the East Asia region.
10. The closed plenum of the Central Committee of the Communist Party of China held in November 2013, at which a plan was discussed for Chinese social and economic reforms for the period up to 2020. The outcome document, published after the plenum, says that one of the priorities of China’s economic policy is the transformation of the yuan into an international currency. An important tool for achieving this goal is called the rapid transition of the yuan to full currency convertibility.
In reality, each of the steps listed above are delayed-action mines. The explosions of these mines could change the world beyond recognition. Each of these steps are worthy of individual analysis. Take Beijing’s appeal to its oil suppliers with the suggestion that payments be made in yuan, for example, made on 6 September 2012. After discovering this secret information, Lindsey Williams called it the sensation of the 21st century. In his opinion, 6 September 2012 can be interpreted as the day that China launched a nuclear strike against America and the Federal Reserve, and as the beginning of the end of the oil-dollar standard that has existed for almost 40 years. Of course Williams, just like Michael Snyder, is creating an artificial effect of sensation. Clearly, no nuclear strike took place against America and the Federal Reserve on 6 September 2012. It was nothing but the next delayed-action mine being laid down.
All of the steps listed above are aimed at liberating China from the iron embrace of the American dollar on the one hand, and converting the yuan into an international currency on the other. It is true that there are big differences of opinion in the Chinese government about how these aims should be achieved and what should be understood by an «international» yuan. It is exactly for this reason that the decision was taken to make the latest plenum of the Central Committee of the Communist Party of China a closed plenum. Judging by a number of signs, it involved an extremely heated discussion, and the struggle between free marketeers and statists continued. The free marketeers are slowly but surely pulling the rope over to their side, although the statists are not laying down their arms. The wording of the outcome document is rather vague. Nevertheless, it is difficult not to notice the trend towards the future liberalisation of China’s economic policy.
The logic of Chinese liberals
Let us return to the statement by a deputy governor of the People’s Bank of China on 20 November this year. Its meaning becomes a little clearer if it is compared with the statement made several days before by the governor of the People’s Bank of China, Zhou Xiaochuan. He announced that the central bank would «mostly» abandon currency interventions. So these kinds of statements by Chinese central bank officials were not made from the time when the yuan’s fixed rate was cancelled. You will recall that up until 2005, the yuan had a fixed rate of exchange against the US dollar and other freely convertible currencies. Moreover, the rate was clearly undervalued, which stimulated the export of Chinese goods to the global market, including to America. It was this undervalued exchange rate for the yuan that became an important reason for China’s winning pace throughout the world it, and it caused an active surplus in the country’s balance of payments and trade. Under pressure from America and other rival countries, Beijing was forced to abandon the yuan’s fixed rate of exchange and switch to a so-called «managed float» of the national currency’s exchange rate. Firstly, this regime stipulated that fluctuations in the yuan’s exchange rate should be minimal (so as not to throw national manufacturing and trade out of gear). Secondly, the yuan should continue to be a «cheap» currency as before. And for this, so-called currency interventions were needed. These refer to the banal purchase of «green paper» by the central bank of China, or the creation of an artificially inflated demand for US currency, in other words. Hence the dollar’s inflated exchange rate and the yuan’s undervalued exchange rate. This is how the central banks of all the countries on the periphery of global capitalism act, however.
The logic of Chinese liberals is very simple: China does not need a stable and cheap yuan. It is far too costly for the country, since they have to concern themselves with the constant purchase of American currency and the accumulation of reserves. A completely free yuan does not need large reserves. Thus the headache that has been plaguing the country’s government for many years is disappearing, and the liberals would now like to put a lid on the matter.
(1) Michael Snyder. China Announces That It Is Going To Stop Stockpiling US Dollars // The Economic Collapse, November 21st, 2013