There is a lot of excitement about recent changes in the approach of the Chinese government to the ‘peg’ between the $US and the Yuan.
The question is simple:
1. How much of an undervaluation of the Yuan, if any, does China wish to maintain?
2. How does it plan to achieve the capital exports required to achieve it?
Whatever their “goal” it can be achieved with or without a peg.
In fact the ‘politics’ of doing it are much better if you don’t use a peg and simply encourage the export of capital to any sap who will take it – e.g. Australia. If you can do it in a highly distributed fashion – lots of small individual exports – even better – and if you can do it to a country that has rule of law and will not just grab the capital if they feel like it – even better still!
It is unlikely that China is seeking to suddenly ramp up their capital exports to ‘enhance’ their competitiveness by much and it is more likely they are just seeking to undo the erosion that resulted from floating up with the US dollar as a result of the peg. That doesn’t mean China would not seek to enhance their competitiveness by seeking to drive a higher level of capital exports but China seems to understand that there is a real cost to exporting capital. So they will probably do just enough to get through the restructuring / re-balancing of their economy.
As China allows the currency to ‘float’ and the peg to weaken they are simply moving to a new ‘distributed’ model for ‘exporting capital’. Just like Japan, Korea, Germany and the various other trade mercantilists who keep their currency lower and their trade partners currencies higher by exporting capital.
Rather than a large wad of official capital exports in the form of ‘official holdings of foreign assets’ we will start to see those decline and they will be replaced by non official holdings by SOE, private companies and individuals.
The government will export less capital (buying $US treasuries) and their SOE, private companies and individuals will export more capital – lending money and buying hard assets like land and industries.
One only needs to read the papers to see this has been a fact of life for the last few years and the last 12 months in particular. China will be more than happy to have swapped a bunch of $US bonds for a large number of off shore assets held by a multitude of Chinese entities. The effect is the same, a lower exchange rate without the bad politics and risk associated with the Chinese government holding trillions in $US bonds.
100,000 CCP members buying new and existing $1M houses in Sydney is a $100B defacto sovereign wealth fund. With Mr Robb allowing $1B chunks of capital imports from China under ChAFTA it will be even easier.
It is not surprising that as the shift in the manner of exporting capital changes the Chinese govt will manage (via Belgium in part) official foreign asset holdings as the new ‘distributed’ forms of off-shore capital holdings expand. If the Yuan falls too quickly because the ‘distributed’ capital exports rise too quickly they can sell off some of the foreign assets ($US bonds) to slow or reverse the descent.
But falling too far too fast is unlikely to be a problem in a world of mercantilism where many other countries are trying the same strategy and few countries are getting wise to the ‘capital export’ / ‘devaluation’ trick and are starting to act (or thinking about it) to slow or resist the trick.
There is only so much foreign unproductive capital clueless neo-liberal ideologues like Mr Robb can let in!
Are you starting to understand why China’s price for signing ChAFTA was all about getting a green light to pour Chinese capital into Oz?
Starting to understand how stupid it is that Mr Robb and many other commentators applauded the “price” as if it was a WIN for Australia.
Ever wondered why Australians are told we need “capital imports” from a country where the per capita income is about $US7000 or to sell them major Australian assets?
China are simply seeking to change the structure of its “capital export” program rather than juicing it up. The objective being to better conceal it, which of course will be very easy as the hopeless “debt addicts down under” right across the political spectrum reckon a new line of credit / cheap imported unproductive capital is almost cause for a national holiday.
“Woohoo more debt for bigger home loans and imported gadgets will be even cheaper!”
That the lazy Liberal National Party “internationale corporatist” neo-liberal ideologues like to run the country on debt and selling it off is not surprising, why the ALP and Greens just stare and flap their gums without effect is harder to explain.
Well not that hard to explain – the ALP are as much under the neo-liberal deregulated capital flows spell as the LNP, and the Greens are only barely starting to understand that almost all of their environmental and social policy platform depends on an understanding of capital flows and that understanding capital flow “risks” requires a commitment to the national interest and not some pan galactic socialist world government.
Both the ALP and the Greens seem mortified that they might need to adopt capital flow regulations (namely, regulations that limit unproductive capital inflows) that protect the national interest and run the risk someone might call them “patriots”.
Perhaps that is a bit harsh as both the Greens and the ALP are opposed to the clauses relating to bringing in off-shore FIFO labour but they are missing the point that the import of unproductive capital amounts to a tariff (via the impact on the $AUS) on ALL of Australian industry and workers and both goods and services.
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