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for the end of summer 2009
- Excerpt GEAB N°34 (April 16, 2009) -
LEAP/E2020 believes that the next stage of the crisis will result from a Chinese dream. Indeed, what on earth can China be dreaming of, caught – if we listen to Washington – in the “dollar trap” of its USD 1,400-billion worth of USD-denominated assets? If we believe US leaders and their scores of media experts, China is only dreaming of remaining a prisoner, and even intensifying the severity of its prison conditions by always buying more US Treasuries and Dollars.
In fact, everyone knows what prisoners dream of. They dream of escaping of course, of getting away from prison. Therefore, LEAP/E2020 has no doubt that Beijing is constantly striving to find the means of disposing, as quickly as possible, of the mountain of « toxic » assets which US T-Bonds and Dollars have become, keeping the wealth of 1,300 billion Chinese citizens prisoner.
In any good escape story, the prisoners do not spend their time making announcements that they are preparing to get away. In fact, on the contrary, they tend to avoid arousing their guards’ vigilance. According to our team, the Chinese declaration of March 24th asking for the replacement of the US dollar by an international reserve currency was both a “testing of the waters” and a warning: a direct poll to make an assessment of the forces at work (within the G20 in particular) when it comes to moving to a post-Dollar era (1), and a constructive and destructive (depending of the reaction to the previous idea) warning sent to the various global players. A responsible player (and Beijing is one) must send discreet signals to the other players likely to follow or help “planning the job”. The preparation (2) and implementation of a « Great Escape » (3) requires the collaboration of several partners and no one who would have been willing to co-operate must end up in trouble because he was not informed (4).
Two estimates of Chinese Foreign Asset Growth (USD billion) - Sources: Central Bank of China / Brad Setser, 01/2009
In any event, thanks to the Central Bank of China’s “testing of the waters”, Chinese authorities have the following four beliefs confirmed:
1. A large part of the other members of the G20 are clearly in favour of a quick shift (5) to a post-Dollar era, in particular Russia, India, South Africa, Argentina, Brazil… therefore Beijing will not be alone when the time for a “Great leap forward ” (6) comes. On the contrary, China will be accompanied by a significant part of Latin America, Africa and Asia. The recent Yuan swap deals agreed with some of these countries is already paving the way in this direction (7).
2. The United States and the United Kingdom are refusing to consider any move in the direction of a post-Dollar era. Timothy Geithner’s blunder, when he considered discussing the Chinese proposal, was quickly corrected by US political leaders, but it revealed an interesting situation for Beijing. Geithner is Wall Street’s man in Obama’s team, and his blunder suggests that the financial Anglo-Saxon community would in fact be quite open to discussing any move likely to maintain their financial privileges, even if it means the end of the “Dollar era”. The « Dollar wall » is not so solid when it leans on « Wall Street ». Financial players have little attachment to a particular territory (this characteristic dates back to long before our current globalised system). In contrast, Washington still does not want to hear anything about the replacement of the US Dollar as global reserve currency, preferring to listen to and believe in soothing experts’ talk instead (8). We know what the result was in the case of subprime loans, the financial bubble, Wall Street’s banks, AIG, TARP, the recession, and so on.
3. The Europeans (except UK) are their usual selves, unable to make any really firm decision with regard to their former US protector (9). They are successful in resisting Washington’s orders, but they are not able to impose an agenda that would displease the United States. Nevertheless, thanks to their multilateral nature and numerous relays, it is obvious that, once the end of the « Dollar-era » has become irreversible, they would bring all their know-how and lobbying capacity to bear the creation of a new international currency, independent of any particular country. That is the reason why China launched the idea that the SDR (10) could be an alternative to the Dollar, proving that it was open to other suggestions than the Yuan (key condition for European support in the future).
4. Beijing is resorting to increasingly clear and bold announcements, always gradual, sometimes even followed by vague denials, coming from less important sources but soon widely circulated by the international financial media. It is thus increasing its freedom of speech (and of action, as, when it comes to monetary issues, what is said can be a lethal weapon or a soothing remedy) without significantly affecting the value of US Treasuries or the Dollar.
This last aspect is indeed the ultimate requirement of the Chinese government: to avoid by any means a collapse in the value of US Treasuries and the Dollar before it has escaped the « Dollar trap ». LEAP/E2020 believes that, in the coming months, China will reveal the exact meaning of this requirement. Is it a goal or a necessity? If it is a goal, then Washington, London and the international financial media are right: Beijing will follow in Washington’s footsteps, merely trying to enhance its influence on US decisions. On the contrary, if it is a necessity, then our team is right and Chinese leaders will strive to sell off their US-Treasuries and Dollars at the best « possible » price, choosing the best « possible » moment, avoiding creating turmoil likely to lower the value of these assets for as long as « possible » (of course, China has been thinking about all the « possibilities » before launching its « escape » plan). But, in contrast to the first option, once all “possibilities” have expired, Chinese leaders will all of a sudden contribute to accelerate the end of the Dollar-era; or, more likely, they will calmly announce that for a number of reasons beyond their control (11), they can no longer continue to play the role of US imbalances’ stabilizers.
Chinese US asset purchases vs. Chinese estimated reserve per category of US assets (green: Treasuries and deposits / Blue: Government Sponsored Enterprises (Fannie Mae, Freddy Mac, etc) / Yellow: Corporate bonds/equities / Red: Annualized estimated reserv
Our anticipation, in this regard, is based on a number of developing trends which, in the last few months, have been confirming our analyses. Since the end of 2008, the Chinese government has undertaken to dispose of 50 to 100 billion USD worth of USD-denominated assets every month. Taking advantage of record-low prices in a large number of assets useful to the Chinese economy (minerals, farmland, energy, EU or Asian corporate shares – not US ones, this is not a minor detail), Beijing « went shopping » in line with its first requirement, making the best of its USD-denominated assets, i.e. exchanging them for non US assets, thus allowing it to go forward on the way to the “Great Escape”.
We would like to emphasise on just how fast this process is taking place. Despite the lack of transparency in the methods used (a precondition to prevent a collapse of US Dollar and Treasuries before the moment chosen by Beijing), a remarkable study has been conducted by Brad W. Setser and Arpana Pandey, published in January 2009 by the Council on Foreign Relations, which was an evaluation of Chinese foreign exchange reserves estimated to total around USD 2,300 billion at the end of 2008 (i.e. more than 50 percent of China’s GDP (12)), of which there were 1,700 billion worth of USD-denominated assets (900 billion in Treasuries, around 550 billion in GSE bonds (Fannie Mae, Freddie Mac…), close to 200 billion in corporate assets and 40 billion in short-term deposits). The author of the study comes to the logical conclusion that Beijing has no further interest in adding to this huge amount of assets, increasingly at risk because of the financial and economic decisions made by the US in addressing the crisis (13), now at risk of loss, and for which, in future, funds will no longer be available due to collapsing trade surpluses and the lack of inward flows of foreign investment.
Top: Chinese foreign exchange reserves and share of US assets / Bottom: Idem as a % - Source : BCA Research, 12/2008
Very logically, Beijing is now disposing of these huge surplus exchange reserves which keep Chinese leaders prisoners of US decisions with no further advantage for their country, as remarkably described by Rachel Zembia in an article published by RGE Monitor on 02/21/2009: loan credits to ASEAN countries (14), swap agreements, green light for 400 Chinese enterprises to trade in Yuan with Asian countries (15), loan credits to African states and Russia, long-term special oil rates negotiated with Persian Gulf states, loan credits to oil companies in Brazil and Abu Dhabi, purchase of European and Japanese company shares (no US shares, strangely…), etc. The author emphasizes the fact that these agreements would include guarantees for Chinese companies to have access to these resources. Contrary to appearances, what is really at stake in these deals is Beijing’s discreet disposal of its US Treasuries and Dollars in exchange for assets that the country needs, moreover available at record-low prices at a time when US Treasuries and Dollars still have some value.
With regard to US Treasuries, China has largely stopped buying them (purchases decreased by USD 146 billion in the first quarter of 2009 compared to the same period last year, representing an increase of only USD 7.7 billion! (16)) and only then purchasing short term (three month) Treasuries (17)!
Between the fact that it has nearly put a complete end to its purchase of US Treasuries and that it is accelerating the pace of its« global shopping » for more than USD 50 billion per month (swap agreements included), it appears that, between the end of 2008 and the end of summer 2009, China will have disposed of nearly 600 billion worth of USD-denominated assets, and it will have failed to purchase between USD 500 and USD 1,000 billion worth of US Treasuries that the Obama administration has begun to issue to finance its extravagant borrowings. LEAP/E2020 estimates that these two amounts added together give a clear idea of Beijing’s impact on the « Dollar-era » at the end of summer 2009, at the end of the US fiscal year. China’s disposals and failed purchases of US Treasuries alone will then represent a shortfall of between USD 1,100 billion and USD 1,600 billion in the United States’ financial needs. Ben Bernanke will be compelled to print Dollars in a (vain) effort to prevent his country from defaulting on its debt.
US monetary base - Source : Réserve fédérale US, 03/2009
In the knowledge that each time Bernanke declares that the Fed will purchase its own US Treasuries, they lose 10 percent in one day, i.e. USD 140 billion compared to other international currencies, Chinese leaders will certainly find it acceptable to sacrifice USD 400 or 500 billion.
LEAP/E2020 believes that, at this stage, they will consider that they made the best « possible » use of their USD-denominated assets. Then, they would better be among those who push the « button » - or who do not try to prevent it. The second phase of China’s “Great Escape” out of the Dollar will then begin, depending on the behavior of the other key players. Either the Yuan takes its place as international reserve currency along with the Euro, Yen, Ruble, Real, or a process creating a new international reserve currency based on a basket of these currencies will begin. The Dollar will then be out of the race and the G20 reduced to a G18 (without the United States and the United Kingdom, but with Japan no longer able to escape the Chinese sphere of influence). Otherwise, the process of global geopolitical dislocation, described in GEAB N°32, will be underway, based on economic blocks, each of them trading in their own specific reserve currency. |
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发表于 2009-8-8 05:45 AM
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