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Fed Takes aim at Chinese Yuan - fuels Commodity & Gold RallyGary Dorsch Although the United States is still the world’s #1 economy, it’s increasingly feeling the heat of the Chinese dragon, breathing down its neck. At the beginning of the twenty-first century, the US-economy was eight-times larger than China’s - a decade later the figure was down to three-times. China’s $5-trillion economy has eclipsed Japan, Germany, France and Britain, to become the second-biggest, after three decades of blistering growth, and is now within reach of overtaking the US within 10-years. With China’s economic growth rate at 10% and the US-economy struggling at +1.5% growth, - this long-term prediction doesn’t sound that far-fetched. China, with 10-times Japan’s population, has long been expected to catch up with its neighbor. But the global crisis and Japan’s sluggish growth brought that point forward by many years. China has emerged to become the world’s largest exporter, overtaking Germany, which held the title since 2002. Factories employing low-paid workers to assemble iPods, computers, shoes, and toys are leading the boom. China has also passed the US as the world’s largest auto market and producer. Two decades ago, a car industry barely existed in China. In the midst of the global banking crisis, stimulus-driven Chinese growth helped to propel the world’s economy out of recession. Chinese demand for raw materials and other imports buoyed economies from Australia to Brazil to South Korea. China uses more than half the world’s iron ore and more than 40% of its steel, aluminum, and coal, lifting commodity prices. China is the biggest player in the copper market, buying 35% of the global supply, and is the second biggest importer of crude oil. State-owned Chinese companies are pouring billions of dollars into base metal mines and oil fields from Canada to Latin America to Iraq. A free trade agreement between China and South East Asian nations came into effect on January 1st, creating the world’s third-largest free trade bloc. The combined population of the trade bloc is 1.9-billion people with a combined GDP of $6-trillion. Already, the ASEAN countries are providing the raw materials and manufacturing parts for assembly hubs operating in China. About 60% of China-ASEAN made goods end up in European, Japanese, and US consumer markets. China is at the epicenter of the fast growing Asian sphere, with satellites such as South Korea, Hong Kong, Taiwan, India, and Australia, hitching a ride to the Chinese juggernaut. The shift of economic gravity to China didn’t happen by chance. Beijing’s massive intervention transformed its economy into the world’s locomotive. The state-run mouthpiece, the People’s Daily newspaper has hailed China’s economic superiority over Western-style capitalism, boasting about its authoritarian rulers’ ability to make quick decisions and their will to carry them out.
Washington is becoming increasingly alarmed at the rapid rise of China’s economic might, and also worries that Beijing might eventually challenge the US for military superiority in the decades ahead. US Congressional lawmakers have long cited Beijing’s policy of undervaluing its currency, - the yuan, to give its exporters an unfair advantage in world markets, and making China a more affordable place to attract foreign direct investment in new manufacturing plants. In July and August, the US ran a combined trade deficit of about $52-billion with China, with the massive imbalance highlighting the hollowing out of America’s industrial base. After holding the yuan steady against the US-dollar through the financial crisis, Beijing signaled on July 19th, that it would begin to allow for the yuan to drift higher, but at a gradual pace. Since then, the yuan has gained about +2.2%, - far short of what US lawmakers want. US Treasury chief Timothy Geithner told Congress on Sept 16th, “the pace of appreciation has been too slow and the extent of the yuan’s appreciation too limited. We are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly,” he warned. IMF economists estimate the yuan is 5-27% undervalued. As the US-economy continues to stagnate, lifting the all inclusive U-6 jobless rate to 17.1% of the workforce, the Obama administration and Congress are starting to wage an increasingly hostile war against China, demanding that Beijing allow the yuan to rise significantly, and at a faster rate. The US House of Representatives passed a bill on Sept 29th, with huge support of 348-79, that treats China’s exchange rate as an unfair subsidy, and allows US companies to request a countervailing tariff to offset China’s price advantage. Such legislation, if passed by the Senate, and signed by the President could ignite a full fledged protectionist trade war.
The US-Treasury and the Federal Reserve (“Plunge Protection Team”) are seeking to corral central bankers and finance ministers from other G-20 nations, to join Obama’s campaign to strong-arm Beijing into raising the value of the yuan more quickly. The US-Treasury is preparing an all-out “currency war,” which has already started to inflate commodity and stock market bubbles, by instructing the Federal Reserve to send signals about a resumption of “quantitative easing” (QE-2) or the printing of dollars to purchase US Treasuries notes, in the months ahead. The Fed is expected to pump vast quantities of freshly printed dollars into the money markets, in a bid to lower long-term Treasury yields lower. The markets have already discounted the probability of at least $500-billion of QE-2 injections. On the surface, the Fed’s propaganda artists say they aim to prevent a deflationary collapse and stave off a “double-dip” recession. However, clandestinely, the Fed is monetizing the federal government’s debt, and is prepared to buy the Treasury notes that Beijing decides to dump, should a full scale Chinese-US trade war erupt. Discounting the probability of QE-2, the US-Treasury’s bond yield advantage over comparable Japanese bonds, has narrowed sharply, thus weakening the US-dollar to a 15-year low of 81.75-yen. Tokyo has tried to offset the Fed’s QE-2 gambit, saying it plans to launch its own version of QE-3, - a 5-trillion yen ($60-bil) scheme, designed to purchase Japanese government bonds (JGB’s) and other securities. On September 15th, Tokyo acted unilaterally, dumping some 2.1-trillion yen into the foreign currency market, for the first time in six-years, and purchasing of $25-biilion, while trying to defend the US-dollar at 83-yen. However, two-weeks later, the impact of the BoJ’s “shock and awe,” intervention scheme had worn-off, with the US-dollar sinking to new lows. Japan’s counterattacks have failed to reverse the US-dollar’s slide against the yen, because the size of the Fed’s QE-2 printing spree is expected to be at least ten-times greater magnitude than Tokyo’s QE-3. And because Beijing essentially pegs the yuan to the US-dollar, Japan’s exporters are getting slapped with a double whammy, a rising yen versus the US-dollar, and a rising yen versus the Chinese yuan. Since early May, the yen has risen +10% to around 8.2-yuan, making Japanese goods more expensive in China, and also in neighboring Hong Kong, where the central bank pegs the US$ at around HK$7.78.
Tokyo’s financial warlords are very worried about the yen’s strength, since the growth rate of Japan’s exports have already slowed by two-thirds, from +45% at the start of this year, to +15% in August. Japan’s exports are also becoming less competitive than those from Asian tiger - Taiwan, where the central bank enforces a “dirty float,” by restricting the US-dollar to a narrow 10% trading band versus the Taiwan dollar. If left unchecked, the yen’s upward spiral against rigged Asian currencies, and the US$, could push Japan’s export growth into negative territory by next year. Taiwan’s exports account for roughly 70% of its economic output, and trade data for September showed the growth rate for its exports slowing to +17.5%, down from +26.6% in August. A slowdown in the growth of shipments to the Chinese mainland, where many goods are processed and re-exported, fell from +18.1% in August to +11% in September. All of this suggests Taiwan’s authorities will not back down from its efforts to slow the US-dollar’s fall, against the Taiwan dollar. Taiwan’s foreign currency reserves jumped $8.4-billion in September, a monthly record, and by about $21-billion in the past 3-½-months. In the first 10-days of October, the Taiwanese central bank bought US$3-billion to prevent it from falling below its red-line in the sand at 30.5-Taiwan dollars, the bottom of a decade long trading range. Through its stealth intervention over the past few years, Taiwan has amassed a huge stash of $380-billion in foreign currency reserves. Yet shockingly, only 4.3% of Taiwan’s FX stash is invested in the king of currencies – Gold. The US Treasury and the Obama team have allowed currency intervention culprits, such as Hong Kong’s Monetary Authority (HKMA) and Taiwan, to slip under the radar, and instead, have chosen to focus more exclusively on Beijing’s rigging of the yuan. However, the smaller Asian culprits might be next in-line. In any event, Washington is trying to gain the firm backing of the world’s second most powerful trading bloc, the Euro-zone, which is also the biggest buyer of Chinese exports, in order to prod Beijing to allow the yuan to rise more rapidly. To read the rest of this article, please click on the hyperlink below: ### Oct 12, 2010 321gold Ltd |
