 Unpegging China
David Chuhran
Archives
Oct 18, 2004
A couple of weeks ago one of the topics at the G7 + China meeting
was the unpegging of China's currency, the Yuan (Renminbi). Although
no agreement was announced and China appeared to balk, there
have been several reports of high level discussions (including
the President) since that meeting interpreted by some as
"a signal that something may happen after all."
There could be some serious consequences of the unpegging process,
especially if it happens quickly. USDollar denominated debt instruments
that are held by the Chinese are actually dollars that have been
removed from our money supply. They were created from debt, as
all of our money's origin is debt, and then they were removed
by the Chinese using existing dollars from their trade surplus.
Tough concept, but trust me it's money supply neutral.
We've had astounding trade
imbalances causing us to print more and more money that's never
reflected in the domestic money supply. That money still exists,
but it's dormant and stands as an unsatisfied claim against the
United States. It was accepted by the Chinese as payment for
goods and then recycled into USTreasuries resulting in a weakening
of the Yuan relative to the USDollar. That's one of the mechanisms
used by the Chinese central bank to maintain the Yuan's peg.
That increased demand for our bonds has also facilitated low
interest rates as the bond prices rise causing their yields to
fall. This relationship has allowed us to live-beyond-our-means
by exporting the inflationary effects of an increasing "real"
money supply while not suffering the consequences of domestic
price inflation.
China gets to build new
factories and sell us stuff; we get to buy cheap stuff with printed
dollars.
That relationship may be changing.
China's overheated growth has fueled a voracious appetite for
raw materials and we're readily seeing that in the price of Oil.
Recently, China
Minmetals has made a $5.5 billion bid for Canada's Noranda
which is one of the world's biggest nickel and zinc producers.
And even more recently:
"China
eyeing investment in Alberta oil sands"
"CALGARY -- Sinopec Corp.,
the giant Chinese energy company, is eyeing a major investment
in Alberta's oil sands -- perhaps even its own project -- as
it pushes to secure supplies for its booming home market. "That
push comes even as the United States increasingly looks to the
oil sands as a secure source of supply for its own uses, with
terrorism and other geopolitical upheaval threatening conventional
oil production overseas."
So, what happens when all
those dollars come out of hibernation?
This may be a sign of the initial
stages of the unpegging. If China stops funding a portion of
our nearly $3 billion/day twin deficit needs, through their purchase
of USTreacsuries, we'll see bond demand fall and yields rise.
Sure, the Fed could step in and "monetize," but that's
inflationary as it creates new dollars that didn't previously
exist.
Also, if they take the proceeds
of their $10+ billion/month trade surplus and begin to buy up
large North American base metal and oil deposits, then those
uncounted, dormant dollars will come washing back ashore causing
domestic price inflation. Not only that, but the Chinese will
now control huge strategic deposits of North American resources.
Finally, without the Yuan currency exchange demand for USDollars
on the Forex, the Yuan will "unpeg" and begin to rise
relative to the USDollar causing Chinese goods to become more
expensive resulting in even more price inflation.
Bottom line: This could spell
higher inflation and higher interest rates. Much higher!
David Chuhran
Archives
email: goldbull@bellsouth.net
Copyright © 2004 David S. Chuhran. All Rights Reserved
321gold Inc
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