China’s $3 Trillion Countdown Clock by Jim Rickards
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It’s very difficult to think of a really important economic issue today that is not also a geopolitical issue. The geopolitical becomes the economic. For every economic issue discussed, there’s a geopolitical face to it, and vice versa. You really need to mash up the two together.
One of the biggest convergences today between economics and geopolitics is China’s three trillion dollar countdown clock.
The first that needs to be made is that this problem used to be a four trillion dollar countdown clock, and it’s now down to three trillion. Currently, numbers have that figure slightly below three trillion when evaluating China’s hard currency reserve position. Any country has a currency reserve. Think of it like a savings account, to make it really simple. You stick it in the bank, or a brokerage account, and that’s your savings.
Countries are not that much different than individuals. They make money, and they spend money. A country that exports more than it imports is going to have a trade surplus. China is an example of this.
China sells considerably more to the world than it buys. They get paid predominantly in U.S dollars and the excess is what has been built up in the Chinese economy and its reserve position.
Over a twenty year period, by the end of 2014, it had the largest reserve position in the history of the world. It was slightly more than four trillion dollars. While not all of it was in dollars, a majority was.
The other part of that was approximately two trillion dollars that was invested in U.S. government securities of various kinds. That’s what the Chinese economy earned from building huge trade surpluses over the past twenty years.
What has happened since the end of 2014? Well the first thing that happened is that they have lost over a trillion dollars. As of a month ago they were down to about three trillion. A trillion dollars has gone away. Where did it go? The answer is, China has been trying to prop up its currency. Its currency is the Yuan.
The exchange rate between yuan and dollars is around seven to one or just a little bit less. It wasn’t that long ago when it was close to six yuan to the dollar. This meets the definition of devaluation.
How has China done this? The simple version of making the price of anything go up is making considerable purchases. China has gone into the market and used dollars from its reserves to purchase yuan, its own money, in order to keep it stronger.
In doing that they have pushed a plan of spending the dollars. U.S dollars are leaving and that’s where the trillion dollars has gone. Ultimately, the Chinese economy has used upwards of a trillion dollars to prop up the yuan.
Where has the rest gone? The Chinese people are trying to get their money out of China. I have recently returned from China. While there for over a week I spoke with a lot of people, not just the elites. One thing I heard across the board, without exception, was that everybody’s trying to get their money out of China.