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July 25, 2005

China: From Revolution to Revaluation
by Alex Wallenwein

Lenin and Mao may be dead - but Communism isn't. Living proof: China.

Communist China is the big darling of the world now, with a majority of people feeling more favorable toward China than they do toward the United States. It is also the big darling of big time industrialists, bankers, and world leaders.

They all court China as if it will be the next world leader - and for a good reason.

What could be nearer to a scheming social controller's heart than a successful amalgam of the two most promising human control mechanisms ever devised by mankind: Communism - and Capitalism?

Lest a reader think that the last remark exposes me as a closet socialist utopian, let me qualify the word "capitalism" with the word "fiat" here, for fiat and central banking are what turn free-market capitalism into a silly subterfuge, a convenient smokescreen for hiding a global drive toward absolute social and economic control - one way or the other.

On that note, China is as of today the single most successful lab rat ever spawned by the ongoing globalist experiment in societal engineering that is called "Communism."

China, and its North Korean satellite, are the sole survivors of the old-guard-communist dry-rot that gutted the Soviet bloc nations before and after the iron curtain fell.

Sure, there are Cuba and Vietnam, but those are firmly lodged in the category of "further mentioned" and like the PRNK, are not independently viable without China's active or tacit support. Who do you think helped Kim Il Jong perfect his rocket boosters to where they can now hit the US mainland?

But that's just to set the background.

The point is that China still is a communist country, its apparently free-wheeling pseudo-capitalism notwithstanding. As already pointed out in China's Dirty Trick, its leaders have merely taken the fiat-capitalist system to its final conclusion (i.e., boundless monetary inflation that doesn't show up in price levels for lack of a standard to compare things to), thereby having gone much further in that direction than the free-floating international system has - where currencies must still compete for an appearance of soundness.

Let that be a warning to those who believe a global fiat system is desirable in any shape, form, or fashion.

In the sixties and seventies, communist China scared the world with revolution. Now, it threatens the world financial system with revaluation - except that the world isn't scared.

Ironically - and comically - the world wants China to revalue, and applauds China all the way in doing so - without any idea of the consequences, as the first two post-reval days of currency and bond trading action made only too clear.

The conventional wisdom out there, to which I once also subscribed, is that the yuan is undervalued relative to the dollar and other currencies. That may be so in the short run - simply because that's what people think. It also may have been that way in the past - before the PRC had to print all that currency to buy up dollars earned for its exports and turn them into US bonds.

But as soon as it becomes clear that China has issued way too many nonperforming loans, and has printed way too many yuan to buy those dollars in the past few years, and accordingly has way too much money floating around its economy as a result, that picture may well change in the years to come - and dramatically so.

The Effects - So Far

Judging from today's market action, the Chinese have managed to throw a huge monkey wrench into the world market's grinding wheels. Nobody knows what's going on anymore. Expert, veteran currency analysts see themselves stumped in every respect at the incongruous market actions of the dollar and US stock markets in the aftermath of the revaluation announcement.

The dollar was supposed to go down. It went up.

The Dow was supposed to go up. It went down.

Treasuries were supposed to suffer. They love it.

Gold was supposed to rise. It fell.

Silver didn't know where to go. It was up and down all over the screen, but drifting lower on Friday.

Only oil "obeyed." It went up from $56.72 yesterday to over $58.00 (NY Crude Futures). Sure, it's early yet, and this picture is most likely going to change, but the intended disorienting effect of revaluation is certainly apparent - and that despite the whole world actually expecting China to move!

They just didn't quite expect it to happen now, in this way.

The amazing thing is that seasoned currency analysts are still talking about "what if" China now will have less appetite for US treasuries - as if last year's cumulative TIC data hadn't shown already that China has virtually stopped purchasing them, long before. I guess the readership of some gold info outlets isn't quite as widespread and influential (or as keen) as I thought.

Why Did China Revalue?

Not because of US or even EU pressure, that much is for certain.

Not because it is afraid of world opinion turning negative on China. They don't care - and it's actually turning into their favor..

Instead, China revalued for two main reasons: (1) The Chinese economy keeps chugging and chugging despite central bureaucrat measures to try and slow it; it is growing far faster than they are comfortable with and needs to be slowed at all costs, and (2) it makes it cheaper for them to buy needed imports - like oil.

As a side note, a word to the wise: I hope you didn't speculate on the revaluation with large sums of your assets. If you did, they are now tied up and it has become clear that the slow tempo of revaluation will squeeze even the last hopes of windfall profits by their necks.

Letting the yuan rise in forex value makes "China" more expensive, thereby reducing demand for Chinese goods. Good times can only last so long, and the faster the economy rises, the sooner it will reach its limit. Even Chicoms are afraid that the limit is only all too near. So, the monster train needs to be slowed down.

Ordinary restrictive monetary policy is a waste of time in China. In an environment where borrowed money is free (because few people care about paying it back, knowing they can always get more because of a financial system that have never been "in control" and so can never go "out of control") nobody cares whether the interest rate goes up or not. But making foreigners demand less Chinese goods via yuan revaluation just might do the trick.

It also makes oil (and other imported natural resources) cheaper for them, so hey - why not?

This "slow-the-monster" policy can be observed in action by looking at China's refusal to impede wage growth any longer. It used to be Chicom policy to not tolerate wage-price rises because they can make stuff more expensive and so let on how bad inflation really is in the country. It also would have deterred foreign investment by outsourcing US companies.

But, now that the Chinese have already had their chance to swipe all of our technology by snooping it up from outsourced production plants (and the White House making sure that military use technology is just as easily available to them), and now that the Chinese economic monster needs to be slowed somewhat - why not? Why not let wages rise?

It makes things Chinese more expensive in relative terms and slows foreign demand somewhat. At the same time it improves internal consumption by improving workers' disposable income - a problem the Chinese have been wrestling with for a while now.

But Chinese employers haven't woken up to smell the coffee, yet. They still think they can get away with offering too little pay, or at least less than workers demand, according to this China Daily.com article. Now, Chinese workers aren't willing to work for "too little" anymore - and the government is no longer stepping in to change that, as it. has before.

The really interesting part of this whole revaluation carnival is the automatic adjustment mechanism the Chicoms have built into it. Every day, the yuan can trade in a 0.3% band, up or down. The following day's opening price will be the middle of that prior day's range. This means that - potentially at least - the yuan can rise (or fall) 0.15 percent per day, or up to roughly 55 percent per year!

Either case is unlikely to happen, of course, but this potential is indeed significant.

Next, true to their form of keeping the world guessing and hanging onto their moving (lying?) lips, they have yet to announce the exact composition and weighting of the currency basket they say they are now fixing the yuan to. The dollar is likely to play a major role in that basket, of course, but there is no hard and fast rule that says the Chinese must peg their yuan according to actual trade weights in the basket.

The Dollar Basket-Case

What is rather clear, though, and what hasn't been discussed in the press so far, is that the demand for dollars will not just decrease by 2 percent or so. That was just their initial adjustment relative to the dollar. In future, the "basket" will take over as the value standard.

Trade with the US makes up only one third of China's total trade volume. So if trade-weighting is what they have in mind in constructing their currency basket - or anything even close to trade weighting - then whatever current demand for dollars they still have will be cut by two thirds - and that's just over the course of the next year, alone!

Since this article is unlikely to penetrate the thick cranial walls of corporate America, it will be interesting to observe the shock and disbelief with which future TIC data will be received and examined by the mainstream financial press.

In summary, China's journey from revolution to revaluation is far from finished. It hasn't even begun, yet. As the world stares, mesmerized, eager to trade with China and prop it up to be the next world superpower, eager to turn its back on America and welcome a future communist superpower in order to "balance" the still tremendous influence of the United States, China is gearing up to do just that. And the American corporate and political governance crowd does everything in its power to help this process along - freedom and US national security be damned.

Revaluation is just one more step in the Chinese game plan, and that game plan is a direct extension of Mao's revolution - except that the new revolutionaries are wearing Western business suits and drive Mercedes and Lexi.

The really scary thing, however, is that the entire world has been turned away from gold as a viable store of value - only the Chinese are being encouraged by their government to buy and stock up physical gold as a currency hedge.

It is apparent why the Chinese Leaders want to do that. It ensures their national survival in the face of all economic challenges. What is less apparent is why all other governments effectively discourage their own subjects from owning gold. Is somebody stacking the deck in favor of China?

Boy, will the world have a rude awakening when it begins to smell that cup of coffee being brewed up for it!

Source: marplepubliclibrary.com

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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