China is 15% away from US decoupling, dumping US treasuries and dumping Dollars.
It has also set a bear trap for Yuan short sellers, with a coming short squeeze only a brass monkey can withstand.
The ballsy US is aware of this and has a finger on a financial nuclear option – freezing Chinese government assets (US treasuries) in the US, just as it froze Venezuelan government assets in the US this week.
If pressed, we’ll all be ruined.
Such a worst case scenario has been building with progressive plausibility as each trade war punch and counter-punch ratchets tensions.
But first, apologies for my lack of articles since May 2019. I was finalizing my year-long protégé program at the Speakers Institute (to become a professional speaker so I can spread my message that truth begets trust in US-China relations)
My article in May outlined China’s likely actions when it has no choice but to decouple from the US…ie
- when it can no longer export to the USA
- thus no longer needs a low CNY
- no longer has any fresh USD revenues to recycle into US debt
- no longer needs to hold US debt and dollars and seeks to end the US financial safe-haven status
- sells USD and buys CNY, pushing the currency in the opposite direction… towards 5.0 rather than 7.0…since it cannot export to the US anyway
The ‘15% away from decoupling’ is if/when the US lifts the 1 Sept 10% tariff on $300b of Chinese imports to 25%….aiming to trigger a 1929/Great Depression in China after its Roaring 20s equivalent.
So that the US can stay top dog.
25% tariffs will stop trade. And China cannot devalue by another 10% let alone 25%….(the recent move from 6.9 to 7.00 USD/CNY is a mere 1.4% devaluation) (PS the differences in CNY/CNH terminology is ignored for this article)
So China will go the other way, rely on internal consumption, trade with Belt and Road nations and the rest-of-world (ROW) in their local currencies, and prepare to ‘eat bitter’ as local conditions worsen.
And its ‘I die, you die harder.’ China will seek to trigger an Argentina 2001/2002 style crash in the US, cull the US financial ‘safe haven’ status, cruel the US economy, end Trump’s re-election chances and hope to deal with a new president.
So that China can become top dog.
Could it happen?
China has nearly doubled its money on its US treasuries, (6.6%pa returns on bonds bought ten years ago: 5.5%pa on bonds bought 5 years ago) so it will be taking profits… plus there are currency profits due to a rising USD to CNY particularly since 2014.
With US Treasuries at near record low interest rates, China will be selling at what it believes will be the ‘peak’.
As it sells, US interest rates (yields) will rise, so China’s profits will reduce as it sells more. (see my May 2019 article for estimated profit size –it’s still in profit). But remember its geopolitical aims – ‘I die, you die harder’ –aiming to trigger a financial crisis in the US and change the President.
China will also trigger a bear trap. As foreign traders short CNY at 7+, China will start dumping USD and buy CNY, which will drive the US-CNY exchange rate to 5.0.
(Chinese firms are prevented from short selling due to Chinese currency controls so it’s mostly foreign sellers who are hurt). Overnight Chinese interest rates will climb past 300% for a few days/weeks to force short-sellers to capitulate (HK’s Monetary Authority used the same tactic in 1997)
Chinese SOEs forced by the Chinese government to sell US hard assets (trophy buildings etc) in the past 2 years (estimated $200b?) will be told to convert back to CNY (if they haven’t already) to drive the USD down.
A low USD is good for US exports but with world economic distress, they have no one to sell to, least of all China.
A high CNY will end China’s exports to the US (it was ended by the tariffs anyway) but China will become the major importer for ROW nations.
A high CNY will also mean cheaper repayment of USD borrowings by Chinese SOEs and corporates that had borrowed in international markets.
China will also use USD to buy oil (trade volume up 50% + from Saudi Arabia in recent months to fill China’s strategic reserves)… and implement other cash-for-commodities deals with ROW.
And buy up to $400b of gold to benchmark with US gold holdings in the same ratio to its GDP. Gold prices will surge in USD but not in CNY.
The US has war-gamed these scenarios.
My next article will focus on US actions, using oil and ‘national security’ reasons, buying US treasuries as China sells (printing money, thus opening a Pandora’s box for inflation and falling USD) and seeking to trigger a collapse in China’s over-indebted economy, creating mass social unrest as unemployment rises.
But I will leave you with the US financial nuclear option.
The US this week froze all Venezuelan government assets in the US.
Maybe it was a warning to China.
Imagine if the US froze all Chinese US treasury holdings in the US.
A frightening thought but with ‘progressive plausibility.’
Let’s hope it stays speculative fiction.