The man who could blow-up the US economy
Xi Jinping is without question the most powerful leader of China since Mao Tse-Tung
Xi Jinping’s Titles
The most important title is General Secretary of the Central Committee of the Communist Party, a position he has held for 5 years.
Xi has been aggressively consolidating power around himself since taking office in late 2012. Like his predecessors, he heads the party and the military. (The US president only takes on the role of commander-in-chief of the military.) But Xi has also made himself head of several “commissions” or “leading groups” that are secretive party agencies, but essentially have the final say on everything from economic reforms to state security to cyberspace affairs.
Xi Jinping’s Wealth
So just how rich is Xi Jinping? Actually no assets are directly traceable to Xi and his immediate family, but authoritative sources estimate that his wider family, including his sister Qi Qiaoqiao and husband, Deng Jiamusi, and daughter Zhang Yannan, have business and real estate interests valued at several billion dollars, accumulated without the help of the most powerful family member. It is worth noting that Chinese corporate and real estate disclosure rules, as well as a propaganda system, bans media discussion of leaders’ personal details and removes them from the internet. However, throughout Xi Jinping’s career, there has never been any hint of corruption in either business or politics, and he is widely respected for his efforts to stamp out corruption at all levels of government and business in China.
Of course, where you are the paramount leader of China, all that Power is worth unlimited money.
Gold Reserves
China holds only 2.2% of its foreign reserves in Gold
China’s Foreign Reserves
China's foreign exchange reserves rose by less than USD 1 billion to a 12-month high of USD 3.109 trillion at the end of October 2017, compared with an increase of USD 17 billion in September and missing market expectations of a USD 9.5 billion gain to USD 3.118 trillion. It was the first time that the country's reserves have climbed for nine months in a row since June 2014, as tighter regulations and a stronger yuan discouraged capital outflows. Meanwhile, the value of gold reserves fell to USD 75.238 billion at the end of October, from USD 76.005 billion at end-September. Foreign Exchange Reserves in China averaged 939039.28 USD Million from 1980 until 2017, reaching an all-time high of 3,993,212.72 USD Million in June of 2014 and a record low of 2262 USD Million in December of 1980.
That is almost 4,000 Billion USD Dollars or 4 Trillion US Dollars
In 2016, US GDP was $18.5 trillion but the US government debt is $20 trillion, and that is just the Federal Government
China holds $1.24 trillion of US government debt. The US Trade Deficit with China was $347 billion in 2016
Let’s have a look at the Chinese Currency
The renminbi (Ab.: RMB; Chinese: 人民币; pinyin: rénmínbì; literally: "people's currency"; sign: 元; code: CNY) is the official currency of the People's Republic of China. The yuan (Chinese: 元; pinyin: yuán) is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally, especially in international contexts where "Chinese yuan" is widely used to refer to the renminbi. The distinction between the terms renminbi and yuan is similar to that between sterling and pound, which respectively refer to the British currency and its primary unit. One yuan is subdivided into 10 jiao (Chinese: 角; pinyin: jiǎo), and a jiao in turn is subdivided into 10 fen (Chinese: 分; pinyin: fēn). The renminbi is issued by the People's Bank of China, the monetary authority of China.
Until 2005, the value of the renminbi was pegged to the US dollar. As China pursued its transition from central planning to a market economy, and increased its participation in foreign trade, the renminbi was devalued to increase the competitiveness of Chinese industry. It has previously been claimed that the renminbi's official exchange rate was undervalued by as much as 37.5% against its purchasing power parity. More recently, however, appreciation actions by the Chinese government, as well as quantitative easing measures taken by the American Federal Reserve and other major central banks, have caused the renminbi to be within as little as 8% of its equilibrium value by the second half of 2012. Since 2006, the renminbi exchange rate has been allowed to float in a narrow margin around a fixed base rate determined with reference to a basket of world currencies. The Chinese government has announced that it will gradually increase the flexibility of the exchange rate. As a result of the rapid internationalization of the renminbi, it became the world's 8th most traded currency in 2013, and 5th by 2015.
On 1 October 2016, the RMB became the first emerging market currency to be included in the IMF's special drawing rights basket, the basket of currencies used by the IMF (reserve currency).
What’s the best way for China to start a Trade War with the USA?
China has long harboured thoughts of being a world superpower. Militarily, it has surpassed Russia, but is a long way behind the USA.
Unfortunately uncertainty and insecurity go hand-in-hand. The world seems full of insecurity right now — no better represented than by the looming threat of a trade war between Australia's largest and third largest trading partners.
One of Australia's leading independent economists, Saul Eslake, what a trade war between China and the United States would mean for Australia.
He's normally quite conservative with his commentary but on this occasion he actually said to me: "We just have to hope that it doesn't happen." He made this comment just after Trump was elected 12 months ago
Global economy already struggling
The world hasn't yet recovered fully from the collapse of the Wall Street investment firm Lehman Brothers on September 15, 2008. That single event was the catalyst for a credit crunch that ultimately led to the global financial crisis.
Despite countless politicians telling us everything will be okay, a seemingly endless developed-world property boom and, of course, cheap money (from ultra-low interest rates), the world economy continues to sputter along.
Everything is not OK.
The whole concept of a superpower trade war wouldn't even be a possibility if we were in — for want of a better word — "normal" economic times.
It's a possibility now, though, because President Donald Trump has laid much of the blame on China.
He's made a link between China allegedly manipulating its currency and many of America's (and indeed the world's) economic woes.
What many Americans in the rust belt know is that right now there aren't enough jobs to go around, but Mr Trump has promised to fix that — via, potentially, a trade war with China.
What exactly is a trade war?
A trade war usually involves a series of tit-for-tat trade restrictions imposed on "warring" countries which normally trade freely with one another.
Murphy's Law forecast
Restrictions can include measures such as tariffs (taxes) and quotas (volume limits) on imported goods.
The idea is to significantly weaken another country's export revenue, and encourage consumers to buy from local manufacturers rather than their overseas competitors.
For example, why would you buy a fridge made in China when you could buy a cheaper one built and designed in the United States?
Right now Chinese fridges are cheaper, partly because Chinese unit labour costs are cheaper, but whack a big fat tariff on those imports and the tables (or should I say fridges) will turn.
Likely trigger point for trade war is close
This is where it gets interesting, if it hasn't reached that point for you already.
As such, everything and everyone that could be negatively affected by President Trump’s promised policies are manoeuvring into position to avoid being hurt or left worse off in any way.
As far as China is concerned, the country is right now attempting to prop up its currency to avoid it sinking further against the US dollar — think Weekend at Bernie's — something its aware Mr Trump is watching.
Why do countries push their currencies down in the first place? Largely to make their exports more competitive.
If you don't have to hand over as much money in the currency exchange because your currency is worth more than the country's currency you're buying from, you're financially better off and you're more likely to want to buy goods from that country.
Having a competitive exchange rate can be a real advantage.
The Chinese yuan has been slowly depreciating. China argues it's a by-product of trying too hard to keep the currency from rising but Mr Trump isn't buying it and he's vowed to do something about it.
Both Westpac's head of market strategy Robert Rennie and academic Mr Eslake believe Mr Trump will use the exchange rate of 7 renminbi (RMB) to $US1 as the trigger to declare China a "currency manipulator". The exchange rate currently sits between 6.90 and 6.95.
The higher this number, the less valuable the yuan is compared to the US dollar.
Once he declares China a currency manipulator, he essentially has a mandate to impose huge trade restrictions on the country.
We already know that could include imposing tariffs of up to 45 per cent on all goods imported from the world's second largest economy.
How will Australia be affected?
The obvious question then is how could all of this affect Australia?
To give you two very broad examples of what might happen in the event that the renminbi continues to fall against the USD dollar, to 7 renminbi and beyond.
Firstly Australia's exports, and therefore GDP, could take a big hit because China is Australia's largest trading partner.
If China's economy takes a hit from US tariffs being imposed on its exports it will have no choice but to "balance the books" and import less itself.
Right now Australia's export sector is riding on the back of higher-than-expected prices for iron ore, coal and natural gas, but that's expected to fall back — quite abruptly it's thought — sometime between now and the middle of the year.
If that coincides with a significant reduction in the volume of exports China is willing to take from Australia, we could see a few sweaty palms down in Canberra.
Secondly, one way China is trying to stop its currency from falling to 7 renminbi to $US1 is by selling US treasuries and foreign currency reserves.
It's a sneaky little move central banks like to make. You see, by hoarding other country's currencies, it means that when your currency is falling, you can pull them out and sell big quantities of them in an attempt to lower their value — and raise your currency's value.
The problem is the more the People's Bank of China does this, the harder Chinese commercial banks find it to source yuan for themselves.
This raises the cost of their borrowing, and, as such, they're often forced to lift interest rates to compensate for that.
Of course, if Chinese banks are forced to raise interest rates, so will banks in south-east Asia and eventually here in Australia.
It will also have a dampening effect on the Chinese economy, which will in turn hurt Australia.
The silver lining on the cloud
If that all sounds a bit grim, there is a silver lining.
Anecdotally it appears China is doing everything in its power to stop the yuan falling too far against the greenback. So far it's actually working.
What's scary is how close the exchange rate is to a level that numerous commentators have predicted Mr Trump will use as a trigger to start a trade war with Australia's largest trading partner.
All we can do now is watch and wait.
What would China do if Trump crossed the Red Line?
This is very hard to predict. However, if I were Xi Jinping, I would devalue the Chinese currency by 50%.
Game on! The mother of all trade wars and a huge global stock market crash.
There would only be one winner – CHINA!
Peter A Worcester BA BSC FIAA
18 November 2017