China Carefully Moving to Displace Dollar

by F. William Engdahl
New Eastern Outlook
Dec. 14, 2015

While Washington seems obsessed with trying to humiliate China's President Xi Jinping and make him lose face, sending warships into Chinese territorial waters in the South China Sea just days after Obama's White House meeting with President XI, and other provocative acts, Britain's government is taking advantage of the growing cleft between Washington and Beijing. They are cleverly moving to develop a prominent role in what they see as emergence of the Chinese currency, the Renminbi (RMB), as a major global reserve currency. China for its part is taking cautious but firm steps to create that esteemed status for the Renminbi, something which could prepare the way for an exit of China and others from the dollar and from holding US Treasury debt.

Xi made a major visit to London at the end of October to meet not only Prime Minister Cameron but also Britain's Queen. After his talks with Cameron, the Chinese President proclaimed that China and Britain will build a "global comprehensive strategic partnership" in the 21st century. From Britain's side it is a shrewd move by the financial institutions of the City of London to tie their financial future firmly with that of China as the Chinese Dragon moves to make the Renminbi one of the world's major trade and reserve currencies. It is also bad news for dollar stakeholders as, clearly, Beijing will have little interest in supporting the debt-bloated dollar system in coming years.

The Joint Statement issued after the London talks by the UK and Chinese governments declared, "The UK supports the inclusion of the RMB into the SDR basket subject to meeting existing criteria in the IMF's upcoming SDR review. Both sides urge members who have yet to ratify the 2010 quota and governance reforms to do so without delay to further enhance the voice of emerging markets and developing countries." The last is a direct dig at Washington and the US Senate which is blocking approval of IMF voting reforms.

The joint statement continues, "China commends the UK for being the first major western country to become a prospective founding member of the Asian Infrastructure Investment Bank (AIIB). They look forward to the AIIB's early operation and integration into the global financial system as a 'lean, clean and green' institution that addresses Asia's infrastructure needs."

After the devastation of the Second World War the City of London was forced to cede the lead role as world financial center to New York and the dollar system. Power passed from the formal British Empire to the informal American Empire. Wall Street replaced the City of London after the 1944 Bretton Woods talks.

Times have changed. Today the City of London has become the world's leading financial center, and the place where more currency trade is done than even New York. It has already entered into a bilateral agreement with the Peoples' bank of China to trade in Renminbi and is the third largest RMB center in the world. The question is whether Britain, or as Charles de Gaulle termed her, "Perfidious Albion" is positioning herself as a Trojan Horse for Washington, insinuating herself deep into the evolving Chinese Grand Design. Or is the Trojan Horse preparing to ride away from her Trans-Atlantic partner in the United States, galloping to her east?

China's CIPS Grand Design

What is becoming clear even to those in Washington's Treasury Department is that China has its own long-term strategy, her Grand Design. It calls for becoming fully independent of the US dollar as a reserve currency that can be used to wage currency wars against a recalcitrant China. Today China is the largest foreign holder of US Government debt, an Achilles Heel that in a situation of US financial sanctions or asset freeze could be devastating to Beijing.

A giant step in making not only China but also Russia and other nations less vulnerable to the US Treasury's Financial Terrorism Department actions came this October when Beijing began its own SWIFT interbank clearing system. During the recent US sanctions against Iran, Washington successfully arm-twisted the private Belgium-based SWIFT interbank system to freeze Iran from any international bank transfers, de facto strangling the Iranian economy, making export of oil nearly impossible.

In 2014 when Washington imposed numerous sanctions against Russia, she tried to pressure SWIFT, a private system of some 200 major international banks, to block Russia as well from using SWIFT, something Russia declared would be an act of warfare. In the event, at least that time, SWIFT members refused to impose a ban on SWIFT payment networks. Foolishly, Britain's Cameron and the Russo-phobe Polish government joined Washington in August 2014 in trying to get SWIFT to freeze Russian banks out. In response, President Vladimir Putin ordered creation of a Russian interbank clearing system internal to Russia and it is today operational. China followed with establishment of plans for their own Chinese interbank clearing system that would go international, including with Russian banks, a severe blow to the politicized SWIFT of western banks.

Now China has opened operations on a limited basis of its alternative to SWIFT. It's called the CIPS or China International Payments System. It uses the same coding system as other international payment systems, making transactions more fluid and rapid. It is a super-network that will replace existing multiple clearing houses that process yuan payments, and will rival Visa and MasterCard.

CIPS will be a major support for the internationalization of the RMB and actually more significant in many respects for China's international financial security against US financial attacks, than China's effort to win acceptance by the International Monetary Fund as one of the Special Drawing Rioghts (SDR) currencies used in the IMF currency basket alongside the dollar, yen, pound and euro today.

China's national bank has quietly been laying the infrastructure for this for some time. Already the RMB is the world's fourth most traded currency surpassing the Japanese Yen. Before launch of CIPS however using RMB in cross-border financial dealings was time-consuming and costly with only offshore clearing banks in Hong Kong, Singapore or London able to do the transactions. With CIPS it will be dramatically faster and cheaper. SWIFT will be the loser as will Washington and their foolish financial warfare sanctions.

CIPS will also facilitate financial coordination between China and her BRICS partner countries, especially Russia. The Russian Finance Ministry announced on November 6 that the Russian government will issue state bonds in 2016 to an as yet undetermined amount, in RMB, in a bid to outflank US sanctions and effectively draw closer to her strategic partner, China. The Washington US Treasury Financial Terrorism unit's sanctions imposed on Russia in 2014 targeted its large state-owned banks. Sberbank, VTB, Vnesheconombank, Gazprombank and Rosselkhozbank (Russian Agriculture Bank) were cut off from long-term (over 30-day) Western financing. China could offset that now.

Beijing freezes financial liberalization

Another stragegic move that stands to protect China from the financial speculative attacks that devastated the Asian Tiger economies in 1997-98, is the decision by the Chinese leadership to put major financial market liberalization "reforms" on ice at least until 2020. Washington has openly pushed the reforms to get capital controls lifted to allow the free flow in and out of China of capital.

This June the stock markets in Shanghai and the Shenzhen market began to collapse as a feverish bubble that had been encouraged by the Chinese government in vain hopes of sucking needed capital into debt-ridden state-owned enterprises, burst. An estimaed $2 trillion of on-paper stock valuations vanished into thin-air in four weeks, along with the savings of some 90 million Chinese citizens who bought on to dreams of "get-rich." What emerged from the experience was that the government and financial regulators had imitated the stock market models of Wall Street but without understanding how risky those were, techniques such as allowing investors to buy stocks on margin or broker-borrowed funds.

On November 6, the Chinese Government announced that initial plans to allow free-flow of capital in and out of China, planned for implementation before year-end, has been postponed until end of 2020.

That is a major step in stabilizing the tumult on the stock and other China markets. It also insulates China from the kind of hedge fund speculation that destroyed economic growth in Thailand, Malaysia, South Korea in 1997 when George Soros led a gang of hedge funds to target their financial markets. As it is vainly trying today with China, the US Treasury in the mid-1990s had convinced the Asia Tiger economies to "reform and liberalize" their financial markets, leaving them vulnerable to the attacks.

There reportedly was a heated internal debate in a closed-door September 22 meeting chaired by President Xi between the Chinese Finance Ministry and the National Development and Reform Commission�the state planning agency responsible for infrastructure and other construction projects. Finance Ministry officials argued for more financial liberalization, as did US Treasury Secretary Jacob Lew, in the ill-conceived belief Chinese savers could earn more investing in foreign stocks or bonds than in China and use their "wealth effect" from foreign investments to buy more Chinese Huawei smart phones or laptops to boost domestic growth. Any serious western fund manager holding stocks or bonds in EU or US markets these days has sleepless nights holding the breath fearing a collapse of central bank-induced stock and bond market bubbles that resulted from years now of the various Quantitative Easing zero interest rate policies pursued by the Federl Reserve and the European Central Bank since the 2007-2008 US financial crisis.

In retrospect Chinese leaders might realize that their experience with a US-style stock market bubble and crash force-focused attention on the far more economically important moves to construct the One Belt, One Road rail and ocean infrastructure network across Eurasia.

Japan experienced a devastating destruction of the Japanese postwar MITI economic model after the Plaza Accord of September, 1985 when Washington Treasury Secretary James Baker III pressured Japan to appreciate the Yen and take other measures that created the world's most inflated stock and real estate markets. That bubble burst in 1990 and Japan is struggling with chronic deflation and is yet to recover.

The world does not need a new version of the Wall Street model "with Chinese characteristics." The world needs solid investment in needed infrastructure across vast expanses of Eurasia into the Middle East and Africa. It seems the Chinese leadership is learning that painful lesson. Fortunately, the One Belt, One Road projexct of Xi Jinping had already been designated a national strategic priority.
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F. William Engdahl is strategic risk consultant and lecturer, he�holds�a degree in politics from Princeton University and�is a best-selling author on oil and geopolitics, exclusively for the online magazine�"New Eastern Outlook".