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  1. October 21, 2012 3:40 am

    Patrick: You could have saved yourself a long articles and lots of quotes!

    China is a net creditor, thus a Chinese currency cannot be a reserve currency. Simple as that. It can’t be done.

    When China becomes a net importer they might issue sovereign bonds, but they will be sold immediately for USD – nobody wants to be stuck with monopoly-money once the game is over.

    In truth the Chinese use corn as currency.

    China has tried to keep the RMB undervalued with respect to USD – collecting a lot of US debt – which eventually will be converted into US sovereign bonds.

    Now all that lolly in the currency reserves around the world is just dandy for the US. They can issue tons of sovereign bonds that carry no interest. As long as China is a net creditor the US will not have to pay for the goods they have imported.

    When China turns a net importer, which it will as it cannot feed its own population – the market price on food – typically corn will rise. So China has short changed itself when they exported.
    Presently they are short changing themselves by overpricing of energy and raw materials – which they shortly wont need, as China is winding down.
    They will end up with short changing themselves when food prices go through the roof – that food will have to be paid for in USD.
    Don’t want to part with your USD – splendid – it is you that is starving, not the USA.

    The only way around this conundrum is realising that money is debt, and debt has quality.
    A Spanish sovereign bond is denominated in EUR, but would you prefer it to a German Bundesanleihe? If you are feeble minded – possibly – China has power shopped Spanish sovereign bonds – the interest rate was nice. Fair enough – there is a considerable risk you wouldn’t see your money again – ever.

    Now Germany runs a surplus (or close enough) consistently, so they are a bit short of debt. The outstanding German debt dates back to the time when they bought East Germany (the DDR) – cash. They overpaid the Russian, but small matter – a fool and his money are soon parted.
    Now Putin is a lot of things; but not a fool. Even he has teeth grinding accepted that German sovereign bonds do in fact buy stuff, so a major part of the Russian currency reserve is in Bundesanleihen – even though they yield a negative interest -. stuff Russian wants gets dearer.

    What do you do if You are the toughest, meanest Finance Minister on earth: Wolfgang Schäuble – and are caught short of debt – at least in the scale demanded?

    Well – you borrow it!

    Germany lends Spain EUR for their failed banks (actually deposits fled to German sovereign bonds). They lend the Spaniards their own money at 3% and issue Bundesanleihen at 1%.

    What if Spain doesn’t pay? Oh, they will!

    Spain has so much debt, that they constantly need refinancing of their short maturity sovereign debt. And if they don’t lead a responsible life – hunting tax-evaders and tax pensioners – you know – the little merry occupations of a responsible government – they will be denied credit (7% on a sovereign bond is in practice a vehement NO from the bank).

    When Spain runs out of debt potential there are lots of other defaulters in Europe – Italy and France spring to mind – where the process may be repeated. Germany can print sovereign bonds for a very long time – borrowing somebody else’s debt. Germany has recourse – others have not.

    Now China tried to overvalue their currency against the EUR and kept it undervalued against the USD. They offered solar cells – among other things at a hyper discount price – payable in EUR. But what happened when the Chinese tried to cash the EUR into USD?
    Strangely enough the EUR dropped 12-15% against the USD – so China not only sold at a discount; but also lost when they cashed the cheques that were not honoured in former rate to the USD.

    Chinese president even paid insignificant Denmark a visit trying to purchase pork – we make an awful lot of them. Splendid! But when it came to pricing the oinkers – we had to inform the Chinese dignitary, that as long as American Joe Sixpack has a partiality for spare ribs (Yes, Carlsberg is Danish as well!) – we had another figure in USD in mind. So he probably got a few containers of sows ears – big article in China – pigs ears that is; not containers.
    So Danish consumers will have to eat through the best cuts at fire sale prices to produce all those pigs ears – 50 million of them annually. Normally given to pets to munch on; but they might be persuaded to use hams instead. Kindness to animals is a national trait – pigs though beg to differ.

    As to Chinese pointing out our dwarf size and ridiculous attitude – well – we had to point out that is was our century long experience, that embargoing marine barracks with respect to spare ribs and beer tends to bring unpleasantness – have you ever heard of US troops destroying a brewery?

    The point being: You can’t undervalue your currency with respect to two different reserve currencies simultaneously – a small thing called arbitrage prevents that from succeeding. You might try – it’s your funeral.

    • Vish permalink
      October 25, 2012 11:15 pm

      Thomas – RMB is on its way to being a global reserve currency, whether there is a trade deficit or not. As Patrick pointed out, it is the desire of outsiders to hold and trade in RMB determine the speed at which the transition happens. My bet is that it happens within 10 years.
      Patrick – the swap is also being used for current trade settlements and not just as a backup for a us$ markets freeze. Se Asia is using more of it now. As long as there is enough two way trade plus exporters and importers can avoid fx charges, then why not?

      • October 26, 2012 1:14 am

        No!
        As long as China is trying to keep their currency undervalued with respect to the USD and overvalued vis-a-vis the EUR arbitrage will conspire to hit China both ways.
        The thing is that there is not going to be a two way trade for much longer. China Will have to start being a net importer, where exporters won’t care what China thinks – prices on grain (in USD) will just go up to equalise the unrealistic expectations.

  2. October 22, 2012 1:52 am

    Thomas : you wrote that the renminbi can’t be a reserve currency, because china is a net creditor. As I rember Jim Rogers always saying, that the US has changed from a creditor nation (until the 80′s) to a debtor nation. Al that time, the US dollar has been a reserve currency. In a creditor situation and in a debtor situation. Why can’t china start the same way ?

    • prchovanec permalink*
      October 22, 2012 1:57 am

      Actually, being a net creditor was the main way the United States supplied dollars to the world economy in the 1950s and early ’60s, despite running current account surpluses. Running a capital account deficit that is larger than your current account surplus is one way to become a net exporter of currency. That is why, in my article, I wrote that China would either have to start running trade deficits OR open its capital account and allow a great deal more investment to flow abroad.

      • October 22, 2012 2:03 am

        Patrick: You are right!
        That is exactly what Germany is doing at the moment.

  3. October 22, 2012 2:20 am

    Standing corrected I have for long been an advocate of China investing heavily in Russian infrastructure – not Chinese.
    The purpose of which should have been opening the vast Russian agriculture for grain production, thus depressing world market prices on food.

    Russia’s problem is that their tax base is limited by their oil export. 2/3 of all Russian tax revenue is export tax on oil. And the signs that Russia’s oligarchs investing in railroads are few – to say the least.

  4. October 22, 2012 3:31 am

    ok… thnx… start to understand it

  5. October 23, 2012 12:16 am

    thank you ..they don’t have change jet ..(not to much)
    nice article just i have to say monetary system in chine was not right way in basic of international trade ok now fom 4-5.99 i just read ..and this is one reason export import chines is slowdown of course and crisis in euz is important reason too

    • October 23, 2012 12:47 am

      Princess 1960 – perhaps due to my flawed English – I don’t quite understand what You are writing. But would You care to clarify, as I THINK You have a valid point somewhere.

Trackbacks

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