THE REDBACK REVOLUTION

By JC Collins, philosophy of metrics The Made In China label became a symbol of economic production lost in the western world alongside the rise of cheap labor and goods from the emerging economies. The cultural meme of “everything made in China” became common and could be heard at any given moment, anywhere in the developed world. Whole industries and business models were built around the economic methodology of exporting cheap goods. Such as numerous chains of dollar stores, and brand name clothing outlets, which manufactured products in the Chinese provinces with the lowest labor costs, and then sold the goods at inflated prices to the developed world. China now has the largest economy on Earth, and the monetary structure which made the USD the center of the solar system is shifting towards a multilateral framework. The Chinese currency, renminbi (RMB), or otherwise yuan, which is the unit of measurement, (such as the relationship between the British sterling and its unit of measurement the pound), will soon no longer be taking a subservient position against the American dollar. The yuan, in both its on-shore and off-shore variations, has also been called the redback, drawing on the nickname of the USD, and it’s civil war version, the greenback. For years the redback has maintained a managed currency peg with the USD. This exchange rate regime has been managed by the Chinese government and the People’s Bank of China at an undervalued false exchange rate. Over the last 5 years the redback has become more widely used for global payments, financial investments, and reserve management. The large amount of Bilateral Swap Agreements, BSA’s, and broader acceptance, has not yet been priced into the valuation. Nor has the growing status of the Chinese economy itself. Read more in the post Renminbi Is Already A De Facto Reserve Currency. One of the main reasons for the internationalization of the RMB is directly related to the multilateral supra-sovereign reserve asset called the Special Drawing Right. The SDR is the unit of account used by the International Monetary Fund and is being re-worked as the global reserve unit of account which will replace the USD in the coming months and years. The SDR basket is currently based on the valuations of the USD, the yen, pound, and euro. Every 5 years the basket is adjusted and currencies are included or removed. This the year the basket will again be adjusted and the redback will be added. There are a number of reasons supporting this measure, but none more so than the need for stability in global liquidity. The growing sovereign debt crisis which is spreading from country to country will require large scale debt restructuring on a level that no one economy or domestic currency can handle effectively and efficiently. The optimization of sovereign debt restructuring will take place through multiple methods, such as the SDRM process of the IMF, or Sovereign Debt Restructuring Mechanism. Other methods will be CAC’s, or Collective Actions Clauses. The CAC process will be initially, and primarily, used as a method of incorporating into the issuance of RMB bonds – which will be used in a broader array of debt instruments and bank loans – the methods to address the sovereign debt issue. This process will be used in Greece and the Eurozone as the multilateral develops further into its broader global framework. See post BRICS SDR to Bailout Eurozone. The RMB CAC and BSA dual machinations will build upward towards the SDRM and the utilization of SDR denominated bonds to address global liquidity concerns. These bonds will be issued through the BRICS Development Bank and other financial institutions as the process is expanded internationally. The inclusion of the redback in the SDR basket is required to bring broader stability to the SDR before the debt restructuring can begin in both CAC and SDRM methods. This stability can only be realized if the RMB ends its managed peg to the USD and is allowed to free float on the forex markets. The yuan is significantly undervalued and needs to be strengthened before its inclusion into the SDR basket. The initial IMF meeting to discuss the SDR is in May of this year, with the actual adjustments taking place in the fall months. This means that sometime in the next few months Chinese authorities will have to end the managed peg and allow the redback to become more market oriented. There is a concern amongst economic analysts that China is headed for a “soft landing’ or a “hard landing” as it’s credit markets contract and economic growth slows alongside the global deflation which is worming its way through the sinuses of the existing international system. This line of thought continues into the managed float regime as conclusions are made and published that China will not allow the redback to float freely on the forex markets because it could lead to a devaluation. This simply will not happen because the actual real world value of the RMB has not been priced into the managed regime. Once the managed peg is ended and the currency free floats, the yuan will experience strong real exchange rate appreciation as the existing BSA’s and foreign reserve amounts increase dramatically alongside the further internationalization and inclusion into the SDR basket. The argument which is made against the appreciation of the yuan is that it would destroy China’s trade exporting economy. As such, it would further reduce economic growth and deepen the contraction of credit markets in the country. What isn’t widely accepted is that the appreciation of the RMB and a move away from the existing trade exporting model is exactly what China wants. Not only do they want it to happen, but they have taken strategic and necessary steps to ensure that it happens. Over the last 10 to 15 years China has continued to modernize along with the flow of economic growth. At one point, China was building the equivalent of three Chicago’s every year. The construction of these ghost cities, which have remained relatively empty, created a world wide shortage of iron and rubber. Many analysts assume that since these cities have sat empty all this time that it was a clear sign of a real estate bubble in China. But nothing could be further from the truth. 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