China Declares War – China’s Stealth Ploy to Sabotage the Dollar
by Brittany Stepniak, Outsider Club
*Editor’s Note: I ran the original version of this article in early 2014. I have edited it to reflect current events, with the same thematic issues still ringing true (albeit, more loudly this time around) today.
If the Federal Reserve doesn’t single-handedly murder the U.S. dollar, China will. And it’s going to do it with the dollar’s antithesis. It’s going to do it with gold…
I’ll get to that in a minute, but first let me re-cap what’s happening in the international economy.
Global Liquidity Squeeze
In case you haven’t noticed, the global economy is on the brink. A worldwide credit crunch is unfolding as we struggle to find superficial ways to crawl out of this black hole of debt we’ve created. Most nations are doing so in vain.
But there’s one economy that seems to keep finding innovative ways to circumvent disastrous economic situations.
Over the past six months, China’s stock market has exploded even as the overall Chinese economy has started to slow down. Investors have been using “umbrella trusts” to finance a lot of these stock purchases. These trusts have given them the ability to have much more leverage than normal brokerage financing would allow. This works great as long as stocks go up. Once they start going down, the losses can be “absolutely staggering.”
Authorities in China are doing their part to keep the bubble at bay. Bloomberg reports:
China’s trusts boosted their investments in equities by 28 percent to 552 billion yuan ($89.1 billion) in the fourth quarter. The higher leverage allowed by the products exposes individuals to larger losses in the event of stock-market drops, which can be exaggerated as investors scramble to repay debt during a selloff.
In umbrella trusts, private investors take up the junior tranche, while cash from trusts and banks’ wealth-management products form the senior tranches. The latter receive fixed returns while the former take the rest, so private investors are effectively borrowing from trusts and banks.
Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.
Because the credit boom in China has been one of the leading causes for global growth over the past few years, some economists fear that this unfolding credit crunch will be hugely detrimental as the ripples from China’s pangs are felt all over the world.
And yes, debt has nearly quadrupled in China since 2007. But want to know what else has quadrupled in China in even less time? Its GOLD RESERVES.
Despite gold’s lackluster results in 2014, Chinese demand never waned. In fact, demand for gold bars, coins, and jewelry skyrocketed to historic levels.
China was stocking up on gold, unfazed and probably ecstatic about the price dips, while America was busy getting caught up in its own stock market bull run.
That’s exactly how China wanted it. China’s quiet gold hoarding allowed it to bolster its bid to have the yuan included in the basket of currencies that make up the IMF’s Special Drawing Rights (SDRs), according to an article by Bloomberg.
China imported a record $70 billion of gold without sending the price of gold soaring. China finally surpassed India as the world’s largest importer of physical gold.
As rumors of a global currency war heat up, China undoubtedly has the upper hand here. And it’s making sure to put its money where its mouth is…
Not only is it stealthily hoarding an insane amount of gold, but it’s successfully establishing a rival to the IMF and World Bank — the AIIB — which will be hugely advantageous to its own currency (the yuan) vs. the dollar.
James Rickards, author of Currency Wars, recently interviewed with Epoch Times regarding gold and how China’s using the yellow metal to advance its own currency situation and the IMF to overthrow the U.S. dollar in the process.
In the interview, Mr. Rickards said he had recently met with the head of precious metals operations at the largest gold refinery in the world. And when Rickards met that man, he was very tired… he’d been racing the clock to satisfy gold demand all year long — working 24 hours a day to produce gold.
The fruits of his triple shifts are about 20 tons a week. Half of that — roughly 500 tons a year — goes directly to China. Factor in the gold China’s receiving from other refineries, and we’re talking about a sizable golden fortune.
Additionally, 2014 saw the largest jump in jewelry demand since 2005. From bars to bands, gold is perhaps the most prized possession. Ladies and gentlemen, gold hasn’t been this hot since its historic rally of 2011…
Who Cares about the Yuan?
Although I haven’t been keeping an acute eye on the yuan or renminbi, I know that bloggers have been obsessed with it lately, wondering if it will rise or fall in light of the AIIB and a transition in currency manipulation. It’s interesting, for sure, but it’s impossible to answer definitively here.
What is pretty definite is that China’s going to be A-OK in the long run because it’s stocking up on precious metals (a.k.a. the only currency that’ll ever win a true currency war).
In the midst of a looming correction in the world’s second-largest economy, China’s doing what anyone in their right mind would do: stockpiling gold (and tons of real estate).
But China’s not just taking whatever cheap gold it can get its hands on. No, it’s upped its standards and given the London gold market the boot. Instead of the previous 99% pure gold 400-ounce bar, the new standard demands a 99.99% pure kilogram bar.
This seems insignificant, but it’s smart. It ensures more consumers get what they want (better quality, less weight), and it’s better for smuggling since the 400-ounce bars weigh about 10 kilos (25 pounds) while the new bars are just one kilogram (2.2 pounds)… not to mention they’re as pure as they come.
A consequence of this seemingly subtle change is that the Shanghai Gold Exchange is on its way to taking center-stage on the world’s gold trading market, replacing London.
Does it see something the rest of the world is missing?
To be blunt, yes. It is past the speculating phase. Indeed, it is actively expecting today’s crumbling fiat currency system to come crashing down.
And it won’t take it lying down… that’s why it’s proactively preparing for the Fourth Turning — a complete reformation of our international monetary system. And it is all too keenly aware that it will be those with the most gold who will yield the most power when that day comes.
In the meantime, the U.S. will likely keep using inflated fiat currency to pay its Chinese debt in cheaper dollars. When we inflate, gold goes up. That’s why China bought so much last year when gold suffered major losses — to help hedge all the cheap money we’ll be paying it with, and make up for it in its gold reserves.
In hopes of sidestepping that whole process and avoiding all our worthless cash piles, China’s up to something else very interesting…
Mr. Rickards explains:
What China wants is the SDR [Special Drawing Right, a type of money for governments], because it’s not the dollar. It’s issued by the IMF [International Monetary Fund], and China is simultaneously lobbying for more votes in the IMF.
China is trying to use its willingness to lend money to the IMF to purchase SDR notes from the IMF to give the IMF money to bail out Europe. It’s trying to use that as a lever to get more votes. If it has more votes, it would be comfortable using the SDR as a reserve currency, because its use would be regulated by the membership and that would make China the second largest member after the United States.
The United States is opposing it, but Christine Lagarde [Head of the IMF], is pushing very hard to increase the Chinese role. It’s a complicated global game.
If you said to me, does China want to get rid of the dollar as the global reserve currency, the answer is yes. But most people think it’s that they want the yuan. They don’t. It’s the SDR.
So don’t buy into the herd mentality that China’s yuan will soon be the new global reserve currency. China’s smarter than that. And we should be too.
It wasn’t ever planning on using the yuan to leverage power; it’s planning on using all that gold…
Farewell for now,