The Chinese Aren’t Playing Checkers…It’s Global Chess, And They Are Winning

The US Congress made quite a show of calling on the Chinese to allow their currency to float.  Currently their currency is pegged to the US dollar.  If the Chinese government allowed market forces to determine their currency value compared to other currencies, then presumably the Chinese Yuan would go up in value, reflecting the fact that the rest of the world buys a lot of their stuff.  This is not guaranteed, but it is assumed to be the case.  The US government wants the Chinese currency to float so that, if/when it goes higher, US goods and services will be more attractive both here at home and abroad.

So far, so good.

But the Chinese are not just sitting around, they are strategically making moves in some areas and remaining passive aggressive in others.  First, the Chinese have staunched their purchasing of US dollar denominated debt.  Instead, they are buying the debt of other countries, diversifying their sovereign reserves.  Second, they are now buying the debt of Greece, which has quite a hefty yield on it, anywhere from 5% for 1 year paper to 11% for 10-year paper.  Greek debt has been viewed as toxic by others, but the Chinese “graciously” agreed to buy their debt, then turned around and informed the European Central Bank that the move was meant to help the region work toward a stable Euro.  Hmmm.  This is a none-to-veiled telegraph that the Chinese will buy the Greek bonds, but they expect the European Community to stand behind repayment.

At the same time, the Chinese are remaining mum about their currency fluctuations under the current system.  That’s because while our politicians are blustering, our Federal Reserve is working its tail off to ensure that we win the race to the bottom, meaning that our currency, the US dollar, is the weakest among the major currencies.  The goal is to have US exports at their most competitive by being the cheapest, and at the same time puffing up the rickety assets in the US.  What does this have to do with the Chinese?  Well, as long as their currency is pegged to the US dollar, as we pursue our race to the bottom, they tag along.  Every move we make to weaken our currency (which is what quantitative easing, or QE, does) also weakens theirs, making Chinese exports even more competitive.

So the Chinese are becoming more competitive on a global scale every time the dollar drops, they are using their wealth to buy high yielding debt, and demanding that the EU countries make good on it. 

You’ve got to admit, that’s a pretty good series of moves.

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