CapitalistMarks

China — nefarious or nice

Posted on 26. Apr, 2009 by scott in economic daydreaming, political munglings

A few weeks ago I thought China was merely ’stretching’ (read non-threatening)? in it’s appeal to dissolve the use of the US $ as the international reserve currency (i.e. the currency upon which international trade is based).? The Chinese Premier Wen Jiabao, in preparing for the recent G20 (the 20 leading economies of the world) conference, stated that the use of the dollar (and by inference the United States) was to blame for increasingly frequent (and ever more serious) financial crises.? His suggestion then was to find a new reserve currency.? It doesn’t take a lot of brains to figure out he would like the reserve currency to be the Chinese Yuan, though I think he would settle for anything other than the dollar.? Keep reading.

In point of fact, the last few years have found some countries (primarily oil exporting nations — OPEC and others) using the Euro (because it was temporarily stronger — but sure as heck not more stable).? This was a natural impact of the $’s weakness during the economically misguided ‘Bush’ Presidency.? This proved to be a short lived and wrong move.? The $ has strenghtened and is still the international ‘reserve’ currency, while the Euro has declined a lot in the last few months.

I didn’t worry too much about Premier Jiabao’s posturing, considering it a sort of warning to the U.S. to better manage its currency and banks (one must remember here that China owns about $1 Trillion, with a ‘T’, of U.S. debt — Treasury bonds, Fannie and Freddie bonds, and such).? Hey we are obligated to treat our creditors pretty well.? Face it, we need their money to finance the incredible deficit Obama’s stimulus and social programs are creating.

However, yesterday’s announcement by the IMF (The International Monetary Fund — set up and funded by the ‘richer’ countries of the world to help finance development of the ‘poorer’ countries) was the kicker for me.? I am? seeing the writing on the wall.? The IMF was trying to raise an additional $500 billion to help in their ‘charitable’ efforts ($100 billion each from the U.S., Euro-Zone, and Japan . . . with the rest coming from the other G-20 nations, including China).? The money was supposed to be by way of a loan and President Obama has been pushing Congress to approve ‘our’ $100 billion.

This changed yesterday–at a meeting in Washington D.C. no less.? China (along with India and Brasil . . . but we all know who the mover was) pushed to have the money provided by way of bonds, not loans.? And China prevailed.? They will be funding their ‘bonds’ right away.

There are subtle differences between loans and bonds.? Bonds are typically guaranteed, while loans most often are not.? Bonds can be traded and loans usually can not.? There are other differences too but the important thing is that China got all the attention and the ?win? while our Treasury Secretary (who spoke earlier in the day) appealed for follow-thru on the loans and was ignored.? The win is symbolic of China’s up and coming power and stature among the ‘developing’ nations.

This is dangerous stuff.? We needn’t worry about China trying to cash in on their $1 trillion of ‘bonds’ owed by us–they sell us way too much and they know we need their money to buy their exports (at least right now).? But we had better start worrying about their influence in world-wide financial and economic markets.

All of this is really fitting together.? China was not merely ’stretching’ a few weeks ago.? China was setting the table.? They are tired of U.S. and U.S. Dollar domination of world markets.? The recent comments by China’s Premier must be added to the recent writing of Zhou Xiaochuan, the governor of the People’s Bank of China.? Together, they can only be construed as attacks on the Dollar (and our economy).? Zhou Xiaochuan writes that he wants a new kind of currency to replace the $ — something he calls ’special drawing rights’ or SDRs that is managed (read controlled) by the IMF.

Now, you must be starting to see the danger.? Give China nominal control of the IMF (and that is the direction things are going) and they will control the SDRs (here is a bet:? about a year after they have control of the IMF they will change the name from SDR to Yuan — and have complete control).? Yikes.? These guys are smart, they are aggressive and they are throwing logs on the fire!

President Obama is a nice guy, and he is getting the reputation of being too nice.? He can’t let this latest (no longer subtle) move by China play out.? Taken in total, these words by Chinese leaders demand action.? It is time for this administration to step up to the plate and take a full swing at the threat.

America simply can’t permit these attacks to go on without some kind of firm rebuttal.

I don’t want to be spending Chinese Yuan the nest time I go to Mexico on vacation, or Italy (or Cuba for that matter).

There is a reason the mighty $$ is the world’s reserve currency.? It is more stable and more reliable, over time, than any other currency.? Our government is also more stable and more reliable, over time, than any other government.? Together those facts trump anything China can bring to the plate.

In the case of currency and economics, stability and reliability are paramount.? Think about the multi-million % inflation in Zimbabwe if you aren’t sure.

Secretary Giethner, and Larry Summers (the President’s key Economic advisor) need to start responding with tough but honest rhetoric of our own.? The President should step in as well, particularly if Premier Wen Jiabao starts spouting off again.? Let’s start touting the $ and touting our response to the recession.? Both are good and effective (in America the recession will end this year, probably this quarter, due to the massive stimulus).

Allowing the Yuan to become the reserve currency in third world and developing nations would be a huge mistake and a huge threat to our economic system.? The Yuan is controlled and manipulated by the Chinese Government with absolutely NO transparency.? We can’t let China become the ‘best’ partner to every third world, or developing nation.? We have to start taking positive and lasting economic action in those countries too.? We have to create an atmosphere of credibility that will enhance our own international stature.

The Dollar, and our economic system, may have faults but, by golly, they are safe, sound, secure, and are not manipulated unmercifully at the whim of a single leader (or powerful and secretive minority).

Don’t permit China to think they can get away with this nefarious plot.? Let’s make nice, but do it firmly.

I like the Yuan and have a bunch of them that I have kept from various trips dating back into the ‘8o’s.? But I don’t intend to ever spend them.? They are strictly for show-and-tell.

I like the Dollar even better.? My dollars I intend to spend . . . and I intend to keep on spending them wherever I travel in the world.? They are not for show-and-tell, they are for spending!

The Yuan: prettty and interesting.

The Dollar: important, valuable and easy to spend anywhere, anytime.

Just another thing that makes America great.

Let’s keep it that way!

Thanks for the photo to flickr’s jimmiehomeschoolmom

Tags: dollar, imf, larry summers, presdient obama, reserve currency, sdr, special drawing rights, timothy giethner, Wen Niabao, yuan