Translation and commentary by New Silk Strategies
Ekaterina Trofimova, the author of the article appearing in translation below, has worked in Gazprombank (Russia) as a Member of the Management Board and has supervised the Ratings Advisory Centre, the Centre for Economic Forecasting and the Corporate Communications Department.
We had previously reported on China’s intention to establish its oil futures market in Shanghai, with the futures denominated in gold-backed yuan. We said this move would return the world to the gold standard, which had once made the US dollar the unique reserve currency until 1971 when Nixon took the US off the gold standard. (He later placed the US on the “Saudi standard,” as detailed in our blockbusting 3 part series here: Part 1, Part 2, Part 3).
The Chinese oil futures market opened in March 26 as scheduled.
The Straits Times reports
“The debut of the yuan oil futures on the Shanghai Exchange was hugely successful.
“On the first day of trading, prices jumped, and contracts were made for 15.4 million barrels of crude for delivery in September.”
Western media were muffled in their response, with some saying this would not have much effect on the US dollar’s dominance. But no one disputed the importance of this step and most admitted that this was an attempt by the Chinese to diminish dollar dominance.
Quote from our translation below, speaking of Trump’s trade war and possible retaliation by China:
“But in the end, the chain of reciprocal steps (duties, devaluation, new duties, etc.) will lead to the destruction of world trade. And the destruction of world trade means the dollar loses its status as the world reserve currency, warns the expert.”
The original Russian-language article is from ridus.ru.
China is ready to end both the US dollar and the US
April 10, 02:10 | Ekaterina Trofimova
The trade war can grow into a real one if the parties do not start to negotiate.
The trade war between the US and China is gaining momentum. Beijing, which until recently expressed its readiness to seek a compromise in economic disputes, changed rhetoric and demonstrated its weapons arsenal.
On Monday, Foreign Ministry spokesman Geng Shuang said that the authorities consider it impossible to negotiate on this issue in the current circumstances. At the same time, the adviser to the Chinese Central Bank, Fan Gang, criticized US Treasury bonds.
"We are a low-income country, but we are a country with a high level of prosperity. We must make better use of capital. Instead of investing in US public debt, it's better to invest in some real assets, "Reuters quotes his speech at the Boao Asia Forum, which is currently being held in Hainan Province.
According to the expert, China's high debt load will not lead the country to a financial crisis, since the debt is mainly domestic, and the savings rate in China is 44% of GDP, giving the state a sufficient buffer to deal with risks.
In addition, the Chinese authorities are thinking about devaluation of the yuan, reports Bloomberg. According to the agency, the government prepared an analysis of the national currency, which is now being studied by high-ranking officials of the PRC. In the first part, the effect of using currency as an instrument in trade negotiations with the US is considered, and in the second part, the effects of depreciation of the renminbi (yuan, RMB) in order to compensate for the effect of a trade agreement that would restrict exports.
Devaluation of the yuan is quite possible, but if China does this, the Fed will certainly postpone another increase in the key interest rate, believes Alexei Vyazovsky, vice-president of the Golden Mint House. "An economic war is starting not for life, but for death, and everyone uses their methods," the expert explained to Ridus.
Beijing is unlikely to ditch US debt - that would hit the entire world market, and the Chinese would not be exempted -- but what about reducing the volume of their purchases to the point of complete refusal? Why not? Moreover, if the trade war develops, and China's trade surplus with the US decreases, it will happen naturally - the PRC will simply have less dollars to purchase treasuries.
The Chinese do not bend, Vyazovsky says, and the trade war is a road to nowhere, which is easy to get on, but very difficult to leave. Initially there will really be a minor positive effect for the instigator. But in the end, the chain of reciprocal steps (duties, devaluation, new duties, etc.) will lead to the destruction of world trade. And the destruction of world trade means the dollar loses its status as the world reserve currency, warns the expert.
Conflict situations in relations between the US and China have already occurred repeatedly since the early 1980s, but each time the parties have sat down at the negotiating table and made mutual concessions. Theoretically everything should work out about the same way now. But earlier such disagreements were solved quietly, behind closed doors, were not accompanied by a blaring information background, and such real large-scale global trade wars did not arise.
Now the situation is non-standard, with fundamentally new geopolitical and geo-economic conditions and new (and very unpredictable) leadership in the United States. Therefore, no one knows what all will happen going forward and what will be the result. But while there is an obvious negative trend in the relationship between the two leading countries of the world, and the conflict is growing, actually, the struggle for leadership, from all appearancs, is its main source.
There will be only one
America will continue to put pressure on China due to the fact that China is becoming the world's largest economy and is about to overtake the US in terms of GDP. "But just the same, you can’t crush China," says Vyazovsky. "It will strengthen relations with Africa, and with Russia." Perhaps the Chinese will launch an internal debt market. They said they wanted to launch the gold yuan, that is, to tie it in some way to gold and secretly buy up a lot of gold. It was for this purpose that the gold exchange was launched in Shanghai. One more step, which can also lead to the loss of the world currency status for the dollar, is the beginning of oil trade in yuan. "
China is on the heels of the Americans on all fronts, Nikolai Kotlyarov, professor at the Finance University under the Government of the Russian Federation, agrees with his colleague. Of course, while the Chinese do not reach the rivals in high-tech areas, the size of the economy they have is already greater than America’s, although the quality, of course, is worse.
The PRC has adopted the task of catching up with the United States by the middle of the 21st century. And since the Chinese are consistent in the implementation of their decisions, they can quite well reach the American level of development within 20-30 years. The population of the country is a huge, able-bodied, and there is an impressive diaspora all over the world, with which close ties are maintained.
China is moving toward world hegemony in leaps and bounds, and the American elite does not want to give up this status. There can only be one winner, and the situation is very difficult: experts do not exclude the possibility of armed clashes. This does not mean that a real war will begin right now, but morally humanity is already preparing for such a turn of events.
"The trend, of course, is not very good," Kotlyarov notes. According to him, though only implicitly, restrictions are being removed from Japan in the production of offensive weapons. And Japan and China are long-standing enemies. Strengthening confrontation in the region could sooner or later lead to a serious conflict unless the parties begin to negotiate, to seek compromises.
Driven into each other’s arms
In the event of an escalation of the conflict, a new alliance may emerge, ie, Russia and China. So far, the countries are not more than strategic partners, but the powerful pressure from the US simultaneously on both states simply pushes them towards each other, and experts allow for further rapprochement - both political and economic.
"Under the conditions of Russia's sanctions, it will be necessary to get loans somewhere. Why not in China? Our officials travelled there in 2014, but they did not come to terms, because Chinese banks were afraid that the Americans could also impose sanctions on them. And now they are actually under trade sanctions, " said Vyazovsky.
Russia is also important for China not only as a supplier of energy resources, but also as a reliable rear guard in the north and west, Kotlyarov adds. "Therefore, it is quite possible to expect the formation of a military-political union in the future," he believes.
He recalls Stalin's words that the USSR will be unbeatable in conjunction with China. But Russian-Chinese relations historically evolved uneasily, there were periods of friendship and of confrontation. As a result, the Soviet leadership also failed to establish them. And the Americans apparently believe that in the long term Russia and China cannot be allies by definition: their civilizations are too different, their historical contradictions too big, and there is no mutual trust.
Russia's current relations with China are indeed ambiguous: there are supporters of rapprochement, and there are opponents. The Chinese have the same problem. In China, nationalism is on the rise, and we also have fears of Chinese expansion. But at the political level, relations are unprecedentedly good, experts recall.
Ekaterina Trofimova is the Chief Executive Officer of Analytical Credit Rating Agency (ACRA, Russia, WWW.ACRA-RATINGS.COM), appointed at its foundation in November 2015. Prior to this from September 2011, Ms. Trofimova worked in Gazprombank (Russia) as a Member of the Management Board and supervised the Ratings Advisory Centre, the Centre for Economic Forecasting and the Corporate Communications Department.
New Silk Strategy's Chinese to English translation of “The yuan: a sword aimed at the heart of the dollar”