CHINESE WILL NOT END DOLLAR PEG

Why on earth would China end its dollar peg? The answer is that there is very little pressure for it to do so. The Renminbi used to have a flea like attachment to the US dollar. Slowly, but surely, the flea turned into a leash and in recent times it has become a definite collar around the throat of the world’s reserve currency.

Don’t listen to what the Chinese say. They are masters of tactics and their patience is as long as their history. They will spread confusion whilst being clear only in their own minds about their intentions. Anyone who thinks that the sight of university students grilling and belittling Geithner during questioning last year was a spontaneous occurrence is dreaming. Everything was choreographed.

They will move step by step and even then they will have a choice of at least three steps at each stage. Their long term concern is that China and its population are able to survive and prosper whilst minimizing the potential for political upheaval. Their scouts have scoured and mapped the world and its resources. The Chinese know exactly what they want and need. What they cannot buy outright they will secure through trade deals and what they cannot secure through trade deals they will buy with whichever currency the seller wants. They are cultivating foreign relationships country by country but also at an individual level. They have dossiers on everything and everyone. 

If you doubt their ability to siphon the West just look at how much intellectual property they have been able to “pirate” without any real compensation being paid.

Why end the peg when you have the US pegged to the ground? Why should China destroy its own massive holdings of US dollars if they are still accepted for the purchase of oil and raw materials?

My guess is that China’s currency will gradually achieve a stand-alone status as its relationships with various nations also grow. To wit its various currency deals with some South American nations. More importantly, follow its acquisitions of hard assets around the world. Its manoeuvrings to date are nothing more than keeping the USA in check. Furthermore, the US through its fiscal profligacy and its military overreach is ruining itself in a way that requires no action by China. They are happy and content to sell whatever they can to a superpower that is imploding internally while losing control internationally.

The slow-down of US Treasury purchases is but a shot across the bow to show that its talk can translate to action. 

I have long maintained that the US is concerned with its dollar maintaining reserve currency status rather than value. In fact the ideal situation for the USA is a dollar that is declining in real value but increasing as a percentage of all foreign reserves.  

At the end of the day the whole play is about resources. The USA is addicted to resource consumption whereas the Chinese hungers for them. Put together they both amount to a substantial current and future drain on the world’s ability to supply food, ores and power. 

China’s population is massive and its population restive with an infrastructure that still requires massive investment. It must secure these loose ends. Furthermore, as it proceeds through its “wild west” period of history it must come to grips with shedding some of its autocratic notions that the state can ride roughshod over the citizen. Tanks in the city square cannot be repeated and there will come a time when the rule of law must be respected even if it occasionally means the victory of an individual over the state. 

China also knows that before the Renminbi can become a truly acceptable reserve currency it must have a banking system that is measurable, transparent and solvent. In my estimation it has significant improvements to achieve in these areas. 

China also suffers from both fear and insecurity as it seeks to control the Internet and even restricting the screening of Avatar in what can only described as a paternalistic and backward response in a world that has become global. Its problems with certain ethnic and human rights groups are also thorns that require statesmanship rather than force. 

Because of its size there will always be fears about China’s ultimate intentions and unless it avoids foreign entanglements it could easily damage its progress. The example of the USA though, serves as a reminder of what not to do over an extended period. 

In my mind, the immediate challenge to the peg may come from one of two developments. The first may arise if an economic collapse is precipitated once again in Europe, Japan, the USA or all three simultaneously. What might China do then as it loses customers in a protracted downturn?

The second may come from a USA that decides almost belatedly to become aggressive against a nation that has stripped it of its manufacturing base and left it with mind boggling debt. This came about as a result of buying trinkets from China using Chinese finance to first bid up the price of housing and to then extract this new found wealth for spending. Will the US impose tariffs, import bans or capital controls? Might not Europe follow the US if populist politicians see this as an election winner? 

Be certain that China is in no rush to abandon the peg at least until it can function as a junior reserve currency. And even then, it might still continue the peg if it believes that it can in this way keep the USA in a tight corner. In the meantime it is content to sell to European and American customers at prices it could not achieve at home. 

One final but very important proviso is that the issue of the currency peg may end up being a mute point because if the world’s financial system implodes there will be no currencies as we know them. There will only be the currencies of gold, silver, oil and some other key resources such as grains, left to re-establish a more sane and responsible world.

This is a very fluid world where major developments are almost as unexpected and damaging as the earthquake in Haiti. The more torrid a period the more highly valued asset protection is compared to income generation. 

Gold and silver may seem a historical hangover but the reality is that the greater and more damaging hangover has always been man’s repeated attempts to debase his fiat currencies.

Man made money or metal? At the moment the metal has my vote and the dollar will still be the devil you know in preference to the angel you don’t.

Peter Souleles B.Com LLB.

Sydney Australia