Saturday, December 27, 2014

William Pesek — China Steps In as World's New Bank


Sour grapes, or bitter pill? Looks like a bit of both. Any rate, it's a wake-up call for the West.

The sanctions against Iran and now Russia may turn out to be a bigger geopolitical and geostrategic blunder than the invasion and occupation of Iraq and Afghanistan, along with the Asian pivot and excluding China from the TPP.

Bloomberg View
China Steps In as World's New Bank
William Pesek


39 comments:

NeilW said...

What's funny of course with this narrative, is that the reported sees this as China helping Russia, when of course it is really helping itself.

Of course net exporters will make large purchases of foreign currency and foreign bonds. Those 'liquidity operations' are how it ensures there is enough of its own currency in circulation for export deals to complete.

Since Russia has been abandoned as an export destination by the US influence group, then China sees an opportunity to expand its exports substantially - and stop a global competitor arising.

And of course if it can extract some needless diplomatic agreements from a country than doesn't understand that China really needs the deal as much as they do, then that is because China is a better international negotiator.

And this will continue until we get an import nation that realises it actually pulls the strings.

MRW said...

Neil,

What are you saying here? Either not enough coffee this AM or it's flying over my head.

"Of course net exporters will make large purchases of foreign currency and foreign bonds. Those 'liquidity operations' are how it ensures there is enough of its own currency in circulation for export deals to complete."

Matt Franko said...

M, the govt of the exporters will issue new domestic currency to the exporter firms in exchange for the foreign currency those firms acquire thru exporting. ..

These external currency holdings th hen become "foreign official holdings"...

Rsp

MRW said...

Thanks, Matt. I would never have guessed that.

Tom Hickey said...

What's funny of course with this narrative, is that the reported sees this as China helping Russia, when of course it is really helping itself.

"To paraphrase the 19th-century British statesman Lord Palmerston, countries don't have friends, they have interests." — Max Fisher, Why America spies on its allies (and probably should) atThe Washington Post

The reporter is thinking of the US as Big Brother and sees China as assuming that role. Big Brother plays friend but with a view to its own interests. Here the interest is a tussle for hegemony.

China was the traditional hegemon until the technological revolution that displaced. Now China seeks to restore that position based on its size.

America thinks that owing to American exceptionalism it is the rightful hegemon. Some in the US even think that this is a divinely bestowed right.

This tussle is going to be a dominant aspect of 21st century history. China is now making its move, not actually at a time of its own choosing, but owing to the the aggressive action of the US to prevent that from happening in the 21st century, and the US is wiling to do what it takes.

Tom Hickey said...

he govt of the exporters will issue new domestic currency to the exporter firms in exchange for the foreign currency those firms acquire thru exporting

Until recently, China had been prohibiting exporters from holding foreign currency is banks abroad and required them to deposit it with the PBOC. The PBOC did not convert all the foreign earnings of firms to yuan to spend in the domestic economy in order to control inflation. Firms were required to loan a portion of their earnings to the PBOC where they were sterilized as firm savings. The PBOC only allowed the firms enough to pay expenses and earn a small profit.

Gradually China has been relaxing that requirement as it has gradually been relaxing its dollar peg and allowing the RMB to float in a broader trading range.

China still runs capital controls.

NeilW said...

As a Brit it is somewhat amusing to watch the US go through it's own Edwardian Period.

Tom Hickey said...

As a Brit it is somewhat amusing to watch the US go through it's own Edwardian Period.

As a concerned American I see this period as more comparable to the rise of institutional fascism in post-WWI Germany and Italy.

The deep state, especially the clandestine services, allied with the corporate state that is the command and control center of the empire has been in control here for a long time, but behind the scenes. Now it is becoming more obvious. It's eerie.

Many (naïve) people are still trying to figure out how candidate Obama could reverse direction and double-down on Bush policy after election. As W. said, "Wait till he gets in here."

Matt Franko said...

But Neil this is different as back then it was not like a bunch of states were loaning UK pounds to other nations...

Here today we have China going all around loaning USDs to these states that have USD liquidity issues...

So the CB of Russia will lend its member banks USDs overnight at 18% apr and a swap basis of 52 rouble per USD against good collateral:

http://www.cbr.ru/eng/hd_base/?prtid=swapinfo_sub

So China undercuts this at whatever like 17% and 50 against the same collateral... they get the business because the terms are a bit better...

They just see an opportunity to make more USDs for their own accounts... they are after as many USDs as they can get their grubby zombie hands on... they are off the charts insane USD zombies...

China has more USD balances at the Fed than the IMF or any of these int'l "banks" so-called (they are hardly banks)... look here:

http://www.treasury.gov/ticdata/Publish/mfh.txt

The US would never do this either the Fed or any US banks due to sanctions or whatever...

In any case this is WAAAAAY different that the UK's situation during the Edwardian period under metallic convertibility...

Who were the equivalent insane UK pound zombies during the Edwardian period? I dont think there were any...

So this is a very different scenario today with the USD system...

rsp.

sths said...

And this will continue until we get an import nation that realises it actually pulls the strings.


I've always wondered why only the USA can make other nations believe that accumulating USD supposedly made them richer but another importer nation like Australia can't. Is it just because of their military might?

Matt Franko said...

"USA can make other nations believe"

Evidence please?

Nobody in the USA is making anyone anywhere believe anything...

These people are irrational USD zombies on their own...

Here you have China taking advantage of certain nations current problems with USD liqidity and going all around the globe lending USDs on usurious terms to obtain even more of them...

Hasnt anyone ever heard of "GREED"??????

The Chinese are simply acting as "B-money" USD lenders here as they have over $1T in USD reserves at the Fed earning next to nothing for them...

In fact, the US ptb manifestly believe that imports are a cost and exports are a gain... they have it 180 degrees backwards....

Nobody in the US is making anyone believe anything this is nut-job insane conspiracy theory stuff...

tptb are manifestly self-interested, greed infested morons they couldnt make anybody believe anything....

MRW said...

How does that work operationally, Matt? When the US slapped sanctions on Russia, I thought (naively, perhaps) that it meant putting a hold on Russia's treasury security holdings at the Fed, which the Fed controls.

Since no US dollars can leave the US banking system--other than $10Gs per in cash per tourist--wouldn't the Fed know that China was loaning out its USD to Russian banks, and be able to see Russia's securities accounts at the Fed rising?

Thx.

MRW said...

@st hs, other nations want to net save in US dollars, so they sell stuff to us to get them. We are the reserve currency, what oil is sold in (mainly), and they need those USD to buy oil, for example.

MRW said...

Matt, I think I meant Russia's reserve accounts at the Fed using. I'm writing this on an iPad.

MRW said...

jeezuss. I wrote "rising," not "using."

sths said...

@MRW: I think Neil Wilson has shown that you don't need USD balance to buy imports.
(The example he gives in the following link is about Scotland but I think it would apply to any imports)
http://www.3spoken.co.uk/2014/08/scottish-independence-myths-how-to-buy.html

@Matt Franko: If I understand correctly what you are saying is, the whole world wants to become an exporter (to accumulate USD balance) because they're stupid and greedy. China isn't becoming another world financial power but rather acting like a loan shark of USD. Would that be about right?

Matt Franko said...

M,

I dont think the Russian sanctions have gone that far as to freeze their accounts at the Fed (probably thats what we did to Iran, Cuba, etc...)

Or maybe the sanctions prevent a US/Euro bank from doing it so this void opens the door for the Chinese which is perhaps the point of the article...

iow the US would have to slap sanctions on China as part of this and probably dont want to take it that far... they would have to restrict China's use of their USD balances at the Fed to only US approved uses and this probably wouldnt fly politically... Chinese would shit a brick, etc...

I dont think we have sanctions on Venezuela, or Argentina...etc.. so if the Chinese want to enter into some type of USD lending agreement with these nations that are up a tree wrt USD liquidity, then so be it...

The other thing is that these IMFs, World Bank, etc I dont look at as banks... per se... they must somehow arrange/administer US govt guaranteed loans to the developing nations... but the actual loans must be being made by the big US banks...

So for instance, Ukraine owes in USDs like $135B now which looks like it is in jeopardy of never being paid back.... WHO do they owe this to?

I dont think it is the "IMF" or "World Bank" it is probably a syndicate of member banks (Citi, JPM, etc...) who are 'on the hook' and if the Ukraine defaults, then Congress has to come up with an appropriation to bail out the US banks who actually are owed the $135B... meanwhile they all think we are "out of money!" so they are trying to get a regime installed in Ukraine that will respect these debts that the Yushchenko admin ran up last decade and will agree to make it a policy to make every effort to pay the US banks back the $135B... the motivator from the US govt side is "we're out of money!" and they dont want to have to go to Congress for an appropriation for a bailout again... they just put together like a 17B bridge for Ukraine to hold them over but frankly I dont see them ever getting their USDs back in full from Ukraine they should just cut their losses and learn their lesson...

So China imo is just acting like a big "shadow bank" "B-money" USD lender to these nations that are over a barrel for USDs at present... they probably get fungible collateral (oil? Nat gas? food?...) and charge credit card levels of interest rates....

Its just greed and self-interest operating here as usual imo...

I dont see all of this as a "giant chess board" the way Tom might... I take the position that tptb are just incompetent morons due to all their self-interest and greed that they are at work in 24/7/365... they are incompetent imo...

when you get all caught up in these things to the extent these people are your brains can get turned into scrambled eggs...

rsp,

Ryan Harris said...

Have a gander at this paper. Think in terms of Domestic Sector and Foreign sector where the foreign sector has levered up on US dollars and now the US current account has shrunk (oil exports/weak consumer), dollars are getting more expensive and the fed is tightening.

The door is open for a new currency to replace/rollover maturing USD denominated credit stocks, especially if people expect a more expensive dollar in the future.

China runs persistent, stable trade deficits with many of their trading adversaries. As their capital outflows, have long been categorized as exports (to avoid capital controls) they probably have run larger deficits with the external sector than anyone imagined so there are plenty of yuan available offshore.

As it happens, the USD credit pyramid inside China, and external to China, shrinks, while the Yuan credit pyramid expands, it could strengthen the USD, while weakening the Yuan.

I realize MMT hates any talk of market driven prices rather than central bank stuff (Don't get mad at me Franko!).

I've been shorting the offshore Yuan since last summer on this idea, and so far, it seems to be playing out.

Ryan Harris said...

oops, exports above, should have been imports. My bad.

Matt Franko said...

Ryan I am probably softening on that as somehow the ruble has strengthened to like 52 to the dollar... what I'm starting to think is that the CB at least sets the "minimum" or "minimum guaranteed" exchange rate...

so in this case if the Russian CB says "18% at 52 rubles per dollar"... then if another entity would take LESS than that it can get done there... so for instance if China undercuts the Russia CB here then the exchange rate can be seen to move down at least short term... (China takes 17% at 50...) but if it hits the fan and the only entity providing USDs becomes the Russian CB then what the CB says goes... "to the penny..."...

Lets face it the Chinese have over $1T they dwarf the IMF or World Bank if they want to become a "shadow USD bank" at this point I dont see how you can stop that... they dont have access to the Fed for liquidity but with over $1T who needs it... TARP was only $350B with another $350B in reserve that was never even needed...

and btw Paulson was talking to the Chinese back then in 2008 BEFORE he went to Pelosi! LOL! "we're out of money!".... morons....

I have to think about your ideas there about Chinese trade deficits and if other nations are building up yuan balances...

but I think being short the yuan vs usd is good right now as the western austerity is increasing the competition for sales and both the western and the eastern exporters keep lowering their prices in USDs in the US market...

its like a "price war" that somehow causes trade financiers (ie banks..) to sell their domestic currency for USDs as some sort of hedge... or they have to make up USD asset deficiencies in their US subsidiaries so they sell their domestic currency balances for USD balances they can use to shore up their US subsidiary bank USD reserve assets to offset export inventory loan asset impairments...

So I see this trend continuing short term as exporters compete (on price) for what is currently a fixed supply of leading USD spending flow ... $4.2T annual...

If we ever get a full blown recovery here in the US ... I'm talking like we have to see $150B YoY increase in leading us govt spending... then all of this should reverse and the dollar will top out as then the exporters will stop price cutting and will hold the line on prices or even start to raise them a bit if business/sales are a lot better...

I think China is "in it to win it" and will lower their prices as low as they have to in order to maintain market share in North America... yuan will follow this trend down...

My thesis is that the fluctuations in the exchange rates reflect the fluctuations in the REAL terms of trade between the nations...

Changes in the real terms are the "cause" and the changes in the currency rates are the "effect"...

"forex rates are a function of the real terms of trade..."

the mercantilists lower their prices and the banks "ratify" this by adjusting the exchange rate... it happens somehow "naturally" based on the way intl bank risk management and accounting is accomplished...

The banks see a USD denominated loan asset impairment turn red on their screen and somehow have to hit the "sell yen/buy USD button" to hedge/offset this... at least this is my current thesis...

This is the main reason why the industry want access to the swaps market in the regulated entities, they have to hedge in the regulated entities... I think the latest Liz Warren thing might have prevented them from doing this in the regulated entities...

rsp,

MRW said...

Ryan at December 28, 2014 at 9:53 PM,

How is the Fed tightening?

Tom Hickey said...

Randy has said several times in my recall that the operational constraints are the domestic price level and the fx rate, although I don't have references offhand. Economics is not just about domestic production, distribution and consumption but also trade. Historically, the study of economics was largely about trade. In a mercantilist system this means that the metals are dominant economics forces. In fiat regimes, fx rates are key to trade. While it is a basic principle of economics that imports are real benefits and exports real costs, the focus is on the relative strength of currencies.

Tom Hickey said...

I dont see all of this as a "giant chess board" the way Tom might

The deep state sees it that way and the deep state largely is in control of foreign and military policy, similar to the way influencers and their lobbyists are in control of legislation, as well as candidate selection. All this is the domain of strategists and operatives.

Ryan Harris said...
This comment has been removed by the author.
Ryan Harris said...

The Fed ended taper, and promised to begin to raise next summer. The fed sets rates all along the duration curve by jawboning as much as market operations. Two years have responded, the yield curve has flattened and short-long spreads tightened up, US dollar has strengthened.

Looking at 10 or 30 yr duration, it looks like nothing has happened, but look at shorter 1, 2 or 5 yr yields. In the short term growth and inflation concerns are less of an issue and have moved quite a bit.

NeilW said...

Matt,

You miss my point. The UK Edwardian period was when Britain felt it had an unassailable right to be the biggest economy in the world - when in reality it was decaying from the inside living off the capital built up during the Victorian period.

It took a few more years and a pointless war before reality finally hit home.

NeilW said...

" In fiat regimes, fx rates are key to trade. "

The fx rates are all soft managed by the export-led economies and the banking system to further their policy.

Naturally the rates would move to eliminate the differentials otherwise.

So yes it is all about trade. At the moment in a world obsessed with exports it is about bringing your currency down to the point where trade happens. That is where the forced saving comes from that a secure import nation could take advantage of.

It arises naturally once you realise that a trade involves the exchange of real goods and the exchange of financial goods *at the same time*.

If both arms aren't in place, nothing happens.

So the very existence of trade differentials means that everybody not only got the goods/services they want but also got the financial products they wanted denominated in whatever currency they wanted.

The banking system exists to make money from enabling the financial arms of transactions.


Ryan Harris said...
This comment has been removed by the author.
Matt Franko said...

Ryan,

Interesting slide #16 there at that BIS presentation, I dont know if that guy has that diagram correct... but the guy says here:

"Local currency appreciation strengthens borrower balance sheet"

May be rather: "strengthening borrower balance sheet leads to local currency depreciation..."

iow the borrowing firm's non-financial assets (which are collateral to the bank...) start to appreciate so the banks financing them sell USDs to increase their (bank's) Current Ratio to the corporate target Ratio the bank prefers to operate at.... if they dont do this then they would think they are not leveraging capital most efficiently... so they reduce USD reserve balance assets at the US subsidiary bank as the value of their loan portfolio increases during periods where their customer/borrower is experiencing better general business conditions ...

As the value of their loan assets goes up and down, the multi-national banks simply react defensively/opportunistically in FINANCIAL terms to changes in these REAL terms...

The BIS guy has to break this down further imo... his diagram does not include what is going on in other areas of the balance sheets of both the banks and their customers... its not like everything runs off the financial terms... not surprising someone at BIS would think this way though... "banking is everything... blah, blah, blah...."

Multi-national firms who want to increase/maintain US sales lower their prices to gain share/sales... this REAL event has resultant FINANCIAL implications... oil, autos, industrial supplies, etc...

When they think they can raise prices then it all reverses... right now oil prices are being reduced in a price war and so are many industrial supplies as austerity bites in Europe and US can only come up with at best breakeven YoY fiscal... this is bullish for the currency of the importer, bearish for the currency of the exporter...

rsp,

Ryan Harris said...

The US doesn't have an empire to deteriorate around the globe. The best the US can claim is to have good access to global markets and global institutions that it helped to design, which help promote economic activity.

Chomsky and Hickey might argue otherwise about US hegemony and empire. But it is all smoke and mirrors, men in gray suit stuff.

Matt Franko said...

Ryan what is behind that is a belief that "they just can't be this stupid..." which I am trying to prove "yes, they indeed are that stupid..."

tptb are just neither qualified nor competent to be operating/regulating this system... imo...

I of course could be wrong but I am taking this side of it in any case and trying to develop a causal explanation to prove my point here...

rsp,

Ryan Harris said...
This comment has been removed by the author.
Tom Hickey said...

List of United States military bases

And what might the purpose of these be?

Tom Hickey said...

BTW, when I speak of geopolitics and geostrategy I am speaking chiefly of the discipline developed by the British wrt to their empire and then the Americans, whose foreign policy and military strategists built on this foundation. However, all foreign policy and military strategists are historians and build on foundations lead down from ancient times and they attempt to learn the lessons that can be gleaned from history.

However, the only things that I am familiar with are writing in English, chiefly from some prominent British strategists like Halford MacKinder, and American strategists like Zbigniew Brzezinski. "The Great Game" comes from 19 c. Brits, and Brzezinski added the chessboard analogy.

I don't know how strategists in other countries and regions approach this, but they are certainly well aware of the British and American history of it and how contemporary Anglo-American strategy is proceeding both theoretically and operationally, since they have to react to it. They are aware, for example, that the Anglo-Americans are moving their pieces to encircle Russia and China.

It's a lot easier to figure out what the Anglo-American are thinking since they usually talk about it out loud before conducting operations, and their covert ops are not very disguised. Operating from a position of strength surprise is not as important as intimidation.

However, the Russians and Chinese play their cards close to the chess and one usually doesn't know what they are up to until they actually move. Surprise is important to them. But surprise carries its dangers, too, so they set clear boundaries. When they draw boundary lines publicly, it is a statement not to cross them or the response will be swift, immediate, and appropriate.

Tom Hickey said...

tptb are just neither qualified nor competent to be operating/regulating this system... imo....

Ignorance and incompetence are one chief aspect and the other is self-interest and hubris. It's a dangerous combination, especially when the selection process makes it relatively easy to psychopaths to gain entry and succeed.

Matt Franko said...

Ryan are the magnitudes larger than US imports of goods annual rate of $2T?

That is a pretty big number.... if those imports are being financed and I would assume they are nobody has that much "cash"... then a "10% off sale"could crush the financiers asset by $200B... I dont think the banks could just "suck it up"... so they have to react to these pricing events. ..

Rsp

The Rombach Report said...

I've been gone for a while but this topic and thread of exchanges is a good read. Unless I missed it, I don't think anyone raised the fundamental question about how the Chinese have acquired over $1 trillion in Treasury securities, second only to the Fed from its QE asset purchases. Isn't it the logical progression of deficit spending over a long period of time in a globalized economy? When the US deficit spends it raises domestic aggregate demand. US consumers head off to WalMart or Home Depot to buy products that are largely produced in China. In this context, the question that keeps rumbling around in my head is; who's economy are we stimulating more? The US or China?

This conversation also reminds me of a famous comment made by Treasury Secretary John Connally in 1971 under Nixon, not long before Bretton Woods was abandoned. He told a group of visiting European finance ministers who were expressing concerns about the US exporting inflation that.... "The Dollar may be our currency, but your problem."

Aside from all that, I think Tom Hickey is dead on in expressing concerns about "this period as more comparable to the rise of institutional fascism in post-WWI Germany and Italy." As the old Chinese curse goes... "May you live in interesting times."

MRW said...

@The Rombach Report,

"I don't think anyone raised the fundamental question about how the Chinese have acquired over $1 trillion in Treasury securities."

Well...you said it.

When Walmart, Best Buy, and Target buy tires, computer accessories, and housewares from China, the payment system requires that they wire the money to China's checking account at the Fed.

China has choices:
1. exchange the dough on the open market and wire the yuan home.
2. Leave it in checking and earn 0.25%.
3. Buy something American,
4. Earn better interest than leaving it in checking.
They chose Door #Four. So they had the Fed move the money that Walmart, Best Buy, and Target, paid them from checking to their savings account and bought treasury securities. That amount was up to $1.7 trillion in the fall of 2008, if I remember correctly.
==================

I think Tom Hickey is correct to fixate on the geopolitical onions in this field because Obama and his loony women (Susan Rice, Suzanne Power, Valerie Jarrett) do not know what they are doing. The Clinton admin got rid of the really smart Arabists in the State Department--the Anglo-American strategists Tom referred to--who understood the Middle East, and its relationship with Europe, Russia, and Iran (collectively "The Orient") over the last two centuries. Obama was going to put Chas Freeman, one of the smartest guys in the room, on his National Security Council in February 2009, and the heavily pro-Israel crowd in DC fought tooth and nail to get rid of him. We have become dangerously Israel-centric in this country to the point where it was reported yesterday that Senator Graham was in Tel Aviv vowing, publicly, to Netanyahu that there would be a "violent backlash" in Congress if the Palestinians went to the UN for statehood, and that Congress would "follow your [Netanyahu's] lead on Iran sanctions." This is sedition. Obama's Girls--or as Colonel Pat Lang calls them, the Children's Crusade--have stoked crazy alliances with the Saudis, Qatar, and against Syria, were not funding and are now funding ISIS (depending on the country they are operating in) and generally slapping around the balance of power. None of this is lost on Russia and China, who are viewing the US as a braggadocio teenager driving his Dad's prized Testa Rosa, and tearing up the gardens in the neighborhood because he can. Except the kid is ripping up other people's prized day lily collections, and their carefully pruned bonsai gardens, and rare dwarf hedges.

Our presumption that the rest of the world is stupid and under our thumb, fueled by the profound ignorance and lack of interest of Americans who don't know and dont care about history, could have unintended consequences that we won't see coming over the next six years, but will have to suffer.

Tom Hickey said...

Agree, MRW.

The only thing you left out was, intoxicated with power and fueled by testosterone.

What could go wrong?