Silver Forecaster
China diversifying to lessen
the $ reserve currency role
Julian D.W.
Phillips
www.silverforecaster.com
Nov 20, 2006
With gold leading silver along
by the hand, we feature this week's article on China and its
burgeoning reserves problem, which we believe will be the most
significant event in the global monetary system ever to affect
both gold and silver. Indeed if it continues to grow in influence
on the value of the $, it may well be that silver begins to be
treated as a monetary metal at some point in the future.
Invoicing in other
currencies
The simplest way
to slow down the rate of accumulation of the U.S.$ in Chinese
reserves is to insist that companies invoice customers in
their own currencies only. So when Argentina or South Africa
wants to buy goods from China they will be allowed to pay in
Pesos or Rands. Ask for a price from a Chinese company at the
moment and you can be sure that you will be quoted in the U.S.
$. If they were to ask what country you came from then accepted
your currency [as well as the U.S.$], then they would receive
the currencies of all those that trade with them. Then at some
time in the future they can pay for imports in those currencies.
Meantime, the countries from whom they import will still accept
the U.S.$ in payment for imports. Diversification is then achieved
and without entering those markets which will rattle the exchange
rates.
But the U.S.$' left unused
after that in the international monetary system will then wash
this way and thus lowering the $' value as they become excess
to requirements. As in the case of Britain, the drain of capital
investment will be like a tsunami hitting the state international
trade. The only way they could retain their value would be for
the U.S. authorities to mop these up, bringing this liquidity
back to Treasury instruments and the rest. But the sheer volume
of these excess $' will prove far too great for such an exercise
and will send inflation racing and interest rates trying to keep
up.
Threats to global
trade stability
 As this
happens, other holders of the U.S. $ will be forced to follow
the Chinese to attempt to retain the value of their reserves
through diversification too. The $ will be dropping like a stone
at this point. It is then the U.S. will have to decide whether
or not too impose Capital Controls.
At this point oil producers
will be forced to follow the same route of accepting other currencies
for their oil or simply raising prices to compensate for a falling
$. This will exacerbate U.S. inflation enormously.
Those nations dependent on
the U.S. for their trade will follow suit or lose their competitiveness
as U.S. goods cheapen at the net rate of inflation minus the
exchange rate fall against their currencies.
There will be rising confusion
in international trade as exchange rate moves destroy stability
in prices. The wounds such an event will produce in the international
monetary system will be catastrophic and precipitate precious
metal prices we currently may think impossible.
And the Trade deficit will
continue until growth and import demand are slowed considerably,
or measures are taken by the government to slow them down.
As to financing the Trade deficit,
it would be most surprising if there were any [except the closest
of unwise friends] nations willing to finance the deficit anymore.
Is this diversification from
the $ a near term likelihood? Yes, it is for China which will
diversify its $1 trillion foreign exchange reserves, the
largest in the world, across different currencies and investment
instruments, including in emerging markets, Chinese central bank
Governor Zhou Xiaochuan said last week.
Chinese reserves are about
70% in U.S. debt securities. "(Diversification) includes
currencies, investment instruments, including emerging markets,"
said Zhou. He then confirmed that "We do not have any
new preparations for selling any currencies." China
has to diversify as its future as the leading global manufacturer
is pointing the way to the Yuan fully convertible at some point
in the future in future. Zhou said that a mushrooming trade surplus
meant China needed stronger policy adjustment both on the Yuan
and through boosting internal demand. But he said any changes
to the Yuan would be gradual to avoid unbalancing the domestic
economy.
 China has allowed
the Yuan to appreciate 2.1% since last July only. "The reason
why we adopt a gradual approach for exchange rate reform is because
China has a very large amount of labor working in the trade-related
sector," Zhou said, "So we have to consider this. We
should avoid too much or too sudden closing-down or bankruptcies
of enterprises and laying-off of workers. We are trying to manage
to adjust the balance of payments and meanwhile to keep domestic
economy in the good (state)."
China is growing at its fastest
pace since 1995, but Zhou expressed satisfaction that the pace
of growth was easing from the first quarter's 11.3%. "It
has already slowed down to some extent so we have reached the
expected result of macro-economic adjustment," he said.
Nov 20, 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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