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July 9, 2015
Hong Kong
It’s eerily befitting that
at this very second, all of South China is frantically anticipating a
major storm bearing down on the region.
In this part of the world they call them typhoons, which comes from the Chinese ‘tai fung’, meaning ‘strong wind’.
And strong they are. Here
on the 33rd floor of my hotel in Kowloon right now, I can hear the wind
whipping ominously as if it’s about to blow right through the
windowpane.
Just across the border in
Shenzhen, there’s an even stronger wind, blowing trillions of dollars of
wealth right out of the system.
And more than that, it’s blowing away confidence.
Financial systems are based
on confidence. Think about it-- these governments and central banks
have absolutely nothing tangible to offer.
They print up countless pieces of colored paper backed by nothing of value and pass it all off as ‘money’.
They rack up trillions worth of debt and act like it’s inconsequential.
Banks operate by keeping
only a tiny fraction of their customers’ funds on reserve, loaning out
the rest for wars, ghost cities, and bridges to nowhere.
These shaky nodes make up a
perilously fragile financial system that is just barely held together
by a very thin veneer of confidence.
In order for it to continue
functioning, every participant in the financial system must have
confidence. Or at least have confidence that everyone else has
confidence.
Without confidence, the system collapses very quickly.
Think about what happened
in 2008: suddenly the market lost confidence in the solvency of some of
the biggest banks on Wall Street, and overnight the entire financial
system was in crisis.
Confidence is everything. And China just lost it.
For years the Chinese
government has been trying to build a reputation as a credible financial
leader in order to compete with the West.
The West dominates global banking transactions with the SWIFT system; but China is now launching the CIPS system to compete.
The West dominates
supranational finance with the IMF and World Bank; but China has
launched the Asia Infrastructure Investment Bank to compete.
The US dollar and euro
dominate global reserves and international trade; but China has quickly
loosened controls, established renminbi financial centers around the
world, and entered into numerous swap agreements to compete.
It’s working. Or at least
it was. Confidence in China has been building, most clearly evidenced by
the meteoric rise of renminbi activity.
Even five years ago, the renminbi didn’t even register in international data tracking.
Yet its usage now has
exploded, to the point that the renminbi is now the 5th most widely used
currency in global payments, ahead of the Canadian dollar and Swiss
franc.
But now they’ve gone and screwed it all up.
The absurd bubbles in
China’s stock markets have burst. But rather than let the market take
its natural course, the Chinese government has stepped in to ‘manage’
the crisis with the most mystifying, baffling steps imaginable.
Their early anti-crisis actions included slashing interest rates and reserve ratios to ‘encourage’ banks to keep lending.
Then they actively prompted
small investors to dive headfirst into the marketplace, even suggesting
that people offer up their homes as collateral to buy stocks on margin.
Now they’ve resorted to halting trades-- half of Chinese stocks are now suspended. You can’t buy them. Or sell.
In fact they’re banning
large buyers from selling. And they’re even threatening to jail
short-selling investors who profit from stocks declining.
These measures won’t work. Every bubble eventually bursts, and there’s nothing they can do to prevent it.
More importantly, though, China has singlehandedly destroyed much of the credibility they spent years building.
Just when people were
starting to get over the credibility hump, the Chinese government went
and did all these ridiculous things. Now everyone’s back to thinking,
“Same old China...”
The trust is gone.
We can absolutely expect a
lot of the wind to be taken out of the renminbi sails, slowing its rise
to challenge the dollar as the dominant reserve currency.
Undoubtedly China’s
long-term future is very bright. But this is a major setback. It’s not
that the market is crashing-- it's how the government is responding.
Later this year the IMF is supposed to decide whether or not to include the renminbi in their ‘SDR’ pseudo-currency basket.
This is something that
would be a major step in re-aligning global finance. And it’s a big deal
because the vote only comes once every five years.
Until now, the IMF was practically backed into a corner. They had no choice but to let China into the club.
But now they have all the ammunition they need to deny China, yet again, for another five years.
They can point to this
incident and say, “Due to the unstable nature of China’s capital markets
and regulatory environment, we will not include the renminbi at this
time.”
And that, ladies and gentlemen, keeps the US dollar in the driver’s seat for the next five years.
Let’s put it another way:
the currency issued by one of the most pitifully capitalized central
banks in the world, backed by the greatest debtor that has ever existed
in human history, will dominate the world for another five years.
This practically gives
Uncle Sam carte blanche to spend the next five years completely
unchecked by competition, going even deeper into debt and making their
problems even worse.
The bubble in China may be bursting. But the bubble in America is about to get even bigger.
P.S. Yesterday, it took Nigel Farage just four minutes to completely destroy every argument supporting the Eurozone.
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1 comment:
No I tend to disagree, this tactic against short sellers is just what Wall St. needs in a big way ,, I am waiting for the Chinese to jail the Intl. bankers shortly ,, which will fuel a quick turn around for them ,, just my opinion of course ,, I also feel Simon has just shown his cabal colors........bet he didn't think anyone would notice..........
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