The US, The CHINA: Money Never Let You Sleep

-Kumar Aniket & Ashhish K Paanday*

Week ago in some US daily, there was news that Donald Trump reportedly called his national security advisor at 3 a.m. to ask if the US wants a strong or weak Dollar. Flynn said he was not sure and that Trump should ask an economist instead. The news created several headlines and gained media attention worldwide and expert more or less were agree that what making him worried is non-other than China.   Months back on January 3 he tweeted

China has been taking out massive amounts of money & wealth from the U.S. in totally one-sided trade, but won’t help with North Korea. Nice!

Mr. Trump, since taking charge of presidency and in fact even before that during all his election campaigns, emerges as centre of attraction, and interestingly kept market pundits clueless about his next statement and the actions.

Despite Trump surprisingly has kept the experts clueless about his stances on several other important factors, is much vocal on protectionism. His newly elected Government is showing no mercy for even its closed allies such as Japan and pacific countries who are afraid about upcoming US protectionism and probable retaliation in form of counter protectionism by other countries. There is a big chance that all such things will result in a rapid deterioration in the relations between Washington and some other countries, more particularly with Beijing, which is expected to be seen as the profound immediate trigger of a downward spiral of U.S.-China relations. US-China relation is one of the most important one in today world and despite all differences and competition to be the world leader, it has been carefully nurtured by both Republican and Democratic administrations over decades.

The world economy, although too slowly, but is recovering from the shock it has earlier from European Crisis, Brexit and most importantly from the collapse of 2008 and all such steps specifically the use of currency as a tool to curb other nations, may have disruptive impact, in fact multiplier effect on asset-price volatility on global scale, ultimately overshadowing all the positive gains world has realized from the several kind economic stimulus measure taken in recent past.

We all may have in our mind, more particularly after reading news papers, watching TV shows and listening to global experts, one can have enough reasons to have a simple assumption to take Mr. Trump a villain.  But is he? This question does not have simple answer.

As the financial architecture of the world is being altered by the rise of China and Russia, and specially their constant attempt, comparatively a new strategy, which both have adapted to gradually neutralized the US Dollar, as one of Washington’s weapon of choice since long.  Their attempt has not only limited to that but expended even to the extent to challenge the Bretton Woods’s system and limit the US dominating position in the International Monetary Fund (IMF) and World Bank.

I wish the globalist, propagating Trump and the USA as culprit and blaming it to be responsible to bring disruptions in global economy, would have enough reason to support this move if at any point of time it looks that the Russian and Chinese, who are looking serious to constitute alternatives to neoliberal economics by challenging the Bretton Woods system through a rival financial structure i.e. BRICS News Development Bank (NDB) and Beijing’s Asian Infrastructure Investment Bank (AIIB) and others, will not be as liberal as the even the worst US looks like.

This is more important for USA when Banks and governments in the European Union had also been examining the use of China’s National currency, Renminbi/ Yuan, as whether it can be a reserve currency and when Chinese, with all their growth figures and statics, are engaged to explain them about the stability and attractiveness of the Renminbi as a currency.

This had created all reason for trump to be worried and in their own think line gives all justified factors to take measures which can easily be propagated as the expansion of the currency war with Russia and China.

The Americans aren’t unknown about the facts and as they always do, tried to launch a sees of financial strike against the Chinese, through an attempt to sink or crash the Chinese stock market and hurt investor confidence in the Chinese economy and its stocks. Beijing, however, to safeguard itself, reacted quickly, on its way by stopping the snowballing of stock selloffs and by imposing controls on investment withdrawals. Such measure may work for a while but definitely countering the battle for Chinese is not so easy especially when they are already struggling with debt burdened slow going economy and dampening export demand on global scale.

Chinese since long have controlled the value of the Renminbi, as a means of continuing export trade and as it started to begin to rise, Chinese began quantitative easing to devalue its national currency.  Except that the US Policy makers (one can easily check the statement of US Congress and White House) began to loudly object by accusing the Chinese of financial manipulation and demanded that Beijing do nothing to readjust the value of the Renminbi.

The Neutral  folks  situated all over world, in print media, over  news channels, and in research institutes started to unite with an argument that the Washington wanted  the Chinese to let the value of the Renminbi rise as a means of disrupting China’s economy and market ultimately to the global economy.

Chinese didn’t sit idle but surprised, in fact shocked to the Americans by offloading billions of Dollars in lieu of Yuan to support the exchange rate. This strategy although have worked well in favor of Chinese but recent experience have some more to say and that is not as sweet as expected. Despite China has spent hundreds of billions of Dollars in reserves to keep the Yuan from falling further in the face of capital outflows caused by economic uncertainty but the currency still fell substantially last year, in fact its biggest loss against the Dollar since 1994. If it to believe, China’s foreign currency reserves shrank by over $570 billion in the year to August 2016 in this fight, i.e. to prevent the currency from depreciating too rapidly, according to Treasury estimates. It is even being said that reserves have fallen a further $133 billion since August as capital outflows accelerated at the end of the year. The US federal, which now a days is in practice to make statement for raising the interest rate, may further cause a fall in Chinese currency. This is more worry some because of slow going growth rate and downward predication in producer price index and enormous burden on Chinese to cut the interest rate further.  Chinese may be in a mess but definitely not at brink.

Beijing, in April 2015, around two years back, opened its first Renminbi clearing house in the Middle East and named it Qatar Renminbi Centre, an strategically located place in Qatar from where it to expand its role in regional exchange markets of middle east and North Africa, an attempt to get access to oil and natural gas from the Middle East and North Africa to the People’s Republic of China and more importantly to emerge as option to the US financial structures.

The use of covert hedge funds and cyber attacks, flood of sell orders on stocks, trade barriers and all with not a purpose of victory in the war and not for wealth maximization, are the new arms of this war. It’s also noteworthy that Russia and China are not alone in their desire to break free from the Dollar standard, but Iran, especially after the removal of sanction and because it’s a major oil player, along with others, may lead a move to an Asian reserve currency. All Iranian moves including of the Gulf Cooperation Council members to price oil exports in a regional currency may leads to a Geopolitical threats to the Dollar, which may not be confined to economic competition but may turn malicious and take the form of crisis, the global financial system may simply collapse on its own without a frontal assault due to its internal complexities and spillover effects.

Russia and China are quite extrovert as to become an option  to the countries like Iran and troubled Europe to think beyond the United States for their national security, and allow a chance to even see some benefits in an economically wounded America.

China is not the only major power fighting a financial war. Such warfare, in recent past, was being waged today between the United States and Iran, as well.  Five years back in February 2012 the United States banned Iran from the U.S. Dollar payments systems controlled by the Federal Reserve and the U.S. Treasury. This has troubled the Iran a lot, but Tehran was still able to transact business in international markets by converting payments to Euros and settling transactions through the Belgium-based SWIFT bank message system. In March 2012 the United States pressured SWIFT to ban Iran from its payments system, too ultimately banning Iran from participating in hard-currency payments or receipts with the rest of the world. US Officials were vocal in their objectives ‘‘to cause depreciation of the Rial and make it unusable in international commerce.”  It was expected that the results would be catastrophic for the Iranian economy, an oil export based economy which must requires access to payments systems to receive Dollars for the oil it ships abroad and to import, food, and consumer electronics.

Initially Americans were happy to see the sudden fall of Rial which in black market was trading at half of its previous value.

But Iran fought back, even before the escalation of U.S. efforts, by dumping Dollars and buying gold to prevent the United States or its allies from freezing its Dollar balances. India is a major Iranian oil importer, and the two trading partners took steps to implement an oil-for-gold swap, whereby India would buy gold on global markets and swap it with Iran for oil shipments. In turn, Iran could swap the gold with Russia or China for food or manufactured goods. In the face of extreme financial sanctions, Iran was once again proving that gold is money, good at all times and in all places.

History teaches us but sometimes in indirect way, definitely replacing Dollar with gold is not as easy to move as digital Dollars, and gold swaps have their own risks.

As trade and investment constitute the most important foundation of U.S.-China relations, the dismantling of this foundation will cause spillover effects in other areas, most critically East Asian security, which already facing the hit of ongoing disputes between china and regional powers in Chinese ocean.  Optimists have to say some positives here, as they do not see any significant risk especially the trade lobby that have direct inputs into trade and hopeful that neither diplomats nor business delegates want to negotiate a different arrangement with China. They also say that if it is a matter of negotiating rather than imposing high tariffs and so on perhaps, some of the fears can get mitigated over time. They have proof behind it in terms of short covering in Wall Street after Trump’s victory an indication that Investors are not assuming the worst, the markets relatively looks relaxed, and such stance makes sense.  But for how long?

This assumption is as simple as wrong, once again. The analysts are looking for limited period of time, something, which is not enough. At least when this is a clash of Titans.  The ongoing tussle is a reality and has spread across globally. It could draw players beyond the US and China such as the euro area when the euro area is flooded with Chinese inputs. Something which still remains unclear is that when and how it will with each action and counter action will get uglier.

In near future besides a potential currency war, U.S.-China economic relations could suffer another blow (all credit to Donald Trump administration and hard-line Chinese diplomacy) in forms of more restrictions imposed on Chinese investments in the U.S. Trade protectionism is likely to be extended to restrictions on Chinese acquisition of American technologies and companies because of fear that they could endanger American jobs.  The most visible output can easily be seen in the prospect of concluding, well discussed and enough highlighted at a time, The U.S.-China bilateral investment treaty (BIT), which now is looking very dim. Battles bring destruction, whether it will happen or not but present clash of money never let anyone sleeps.

Photo Credit: Pixabay

-Company Secretary and Independent blogger on Corporate Diplomacy