The Coming Collapse of Communist China
The Coming Collapse of Communist China
JC Collins Philosophy of Metrics
A few years following the collapse of the twin towers the world was almost unrecognizable from what it had been at the end of the 20th Century. After grunge, techno, the explosion of websites, Yahoo, Amazon, Supersize Fries, and Bill Clinton, anything seemed possible.
The lackluster years of the late 1990’s ended with the birth of the music sharing platform Napster and an unremarkable Y2K event. The future strangely seemed both mundane and hopeful. Everything changed with the bombing of the U.S.S. Cole in Yemen’s Aden harbor on October 12, 2000.
At the time, I was in Las Vegas attending the largest mining expo in the world. News of the Cole bombing quickly spread and my first thought was that it was only the beginning. There were those of us who understood on some intuitive level that something bigger was about to happen, but we couldn’t understand the full magnitude of what was to come.
On the morning of September 11, 2001, a mining co-worker, who was meant to be flying up to Canada from Dallas, called to inform me he wasn’t going to make it as all flights were grounded. Planes had crashed into the World Trade Center.
That was how I heard about the largest news event since the fall of the Berlin Wall and the collapse of the Soviet Union. Most of us either raced home or to the nearest boardroom with a television to watch the unfolding events on CNN. Like everyone else that morning, we knew in our guts that things would never be the same.
Three months after those events, on December 11, 2001, China became a member of the World Trade Organization (WTO). The argument was that allowing China to enter the WTO would encourage Beijing to adopt liberal economic and democratic norms. This of course would never happen.
By 2004 Chinese infrastructure projects were using up so much steel and rubber that the cost of large mining trucks and the massive tires which fit on those trucks had skyrocketed. It was said that China was building the equivalent of three Chicago’s every 12 months.
Within just a few years after the return of Hong Kong to Chinese rule everything had completely changed. The World Trade Center was gone, China was a member of the World Trade Organization, America was at war in the Middle East, and the China miracle was being propelled by the expansion of American debt. That’s how fast the world had been transformed.
The role of China becoming the worlds largest creditor nation as America was becoming the largest debtor nation was not an accident. It was by design and was needed in order to keep the global system of banking and commerce moving forward.
The Asian Currency Crisis of 1997/1998 signaled that the growing imbalances and existing exchange rate arrangements with the US dollar were beginning to cause massive liquidity constraints.
It became clear that an alternative arrangement would be required, but it would take another decade, and crisis, before the monetary policymakers in Beijing began to understand the financial predicament, they were in. The development of the New Belt and Road Initiative was a possible solution.
China welcomed the opportunity to expand its own credit markets and modernize the country in a fraction of the time it took Western nations in the last century. The expansion of their own domestic credit market, and membership in the WTO, allowed China to take on ever more increasing amounts of American sovereign debt.
The basic mechanics revolve around the role of the USD as the primary global reserve asset and China’s acquisition of those dollars through balancing trade accounts, or balance of payments. Those dollars need to be invested into dollar-denominated securities, or Treasury bonds, in order to maintain the exchange rate arrangement between the renminbi and dollar.
The major defect in the global monetary framework is that the dollar supply must continue expanding in order to meet global liquidity demands for a growing global economy. The problem is that the dollar is not a true global currency and is in fact the domestic currency of one nation used in a global capacity.
The expansion of the dollar money supply, or excess dollars, through this trade mechanism, must not be allowed to return to America’s domestic economy or it will cause financial trouble in the form of uncontrolled inflation.
China uses these dollars to both purchase US Treasuries and expand its own domestic currency supply. Taking on, in turn, the inflation created by the expanding dollar money supply. Since China’s membership into the WTO its foreign exchange reserve account has exploded with dollar-denominated securities.
These foreign exchange reserves have also increased from 16% of China’s GDP to well over 45% of total GDP. Total China debt-to-GDP ratio has doubled to 300% in the same timeframe and its total public and private debt now rests around $34 trillion. This is a solid indication that taking on US debt has allowed China to expand its own economy through multiple avenues
Consider that the total U.S. debt is around $22 trillion with a debt-to-GDP ratio of 105.4% as of 2017. It is expected that this number should continue to decrease as overall U.S. GDP continues to grow under the Trump mandate. Compare that to China’s debt-to-GDP ratio of 300% and who do you think is in the stronger position?
To make this point, on Monday, June 24, 2019, a U.S. judge found three Chinese banks in contempt for refusing to comply with subpoenas in an investigation into North Korean sanctions violations.
The three banks are under threat of now having their U.S. dollar accounts terminated by the Justice Department or Treasury Department. Cutting these Chinese banks off from the U.S. financial system. All three banks immediately suffered stock price drops. Once again indicating who has the stronger position.
This is just a basic summary of the monetary mechanism which exists between the world’s largest debtor nation and largest creditor nation. All other monetary and financial metrics, including global imbalances and liquidity shortfalls, are squeezed in-between these to polar positions. Nothing will change or improve within the global monetary system without a change to this arrangement.
After the financial crisis in 2008 the Chinese started calling for an alternative to the USD as the global reserve currency. The position from Beijing was that a viable alternative could be evolved from the Special Drawing Right (SDR) of the International Monetary Fund (IMF).
The SDR is a claim on currency and not an actual currency itself and would not provide enough liquidity to meet global demands in a reserve capacity. The claim is for currency which makes up its value composition, or otherwise called basket of currencies.
Back in 2009 these currencies were the USD, British pound, euro, and Japanese yen. China was promoting the idea of adding the renminbi to the SDR composition to begin the transformation of the SDR into a true global reserve asset.
Throughout the years I wrote extensively on this topic and covered much of the ground of what a transformed SDR would look like and how SDR denominated “substitution accounts” could be used to exchange excess USD reserves for SDR reserves.
Eventually the renminbi was added to the SDR composition and it appeared that China’s move on the IMF and the SDR could very well be the direction the monetary world moved.
(Note: There is a lot of confusion about the terminology around the Chinese currency. Some refer to it as the renminbi or RMB, while others call it the yuan. It is both. RMB is the name of the actual currency while yuan is the unit of measurement.
It is the same as the relation between the British Sterling currency and its unit of measurement the pound. In America the name dollar is used for both. The RMB has both offshore and onshore currencies which only complicate matters further.
The offshore RMB was meant to protect the Chinese domestic market from foreign speculators as it attempted to internationalize its currency. This strategy has failed and will now be one of the contributing factors to the collapse if China’s banking industry.)
Another event which happened after the last financial crisis was the birth of Bitcoin (BTC) and cryptocurrency. Bitcoin flew under the radar for years as it built up a large tech following, and its value grew. It was, for all practical purposes, the maximalists answer to corrupt banks and the growing world debt problem.
Over the last ten years the cryptocurrency market has expanded as hundreds of new digital assets were born and proposed use cases for those assets spread. BTC value exploded making millionaires and billionaires in what seemed like overnight.
Newcomers poured into the crypto market hoping for quick gains and wealth. Eventually somewhere around 70% of Bitcoin mining moved to China in search of low energy costs. Technically speaking, China controls the majority of the Bitcoin network’s collective hashrate.
China also accounts for a large volume of BTC trading. This volume increased as Chinese exchanges lured investors with 0% trading fees, which the People’s Bank of China (PBOC) would later regulate against.
This forced some trading volume from the Chinese market and it had a modest impact on capital outflows from China, which was the core objective for Beijing, as some of China’s wealthiest private business interests were moving capital offshore and around the world, in order to avoid the credit bubble which was forming in the mainland. These interests moved a large percentage of it into real estate markets around the world, like New York, Vancouver, San Francisco, Sydney, and Toronto.
It is important to note that these real estate markets are now bloated, and valuation reversals have already begun. This is also true for mainland China markets as well. Maybe even more so.
We are starting to see Chinese money being pulled from these “offshore” markets and this money could very well start finding its way into the Bitcoin and crypto markets from both inside and outside China.
Central bank policies and stumbling bond markets would normally provide the alternative to real estate but we are entering a period where the perfect situation is developing for capital to flee real estate, avoid bond markets, and pour directly into the crypto market, with some overflow moving into gold and other precious metals.
Stock markets may move marginally higher during this transition, but those markets are in the high range of valuation (and under enhanced risk) while crypto is still in the early phase of adoption and remains in the low range of valuation for the time being. This will change substantially in the next 6 to 12 months as the developing fundamentals of the crypto market take root and expand across investor demographics and industry sectors.
Outside of monetary and financial concerns, China also has deep cultural and political fault lines which will move suddenly and dramatically under the right conditions. The Communist Party of China (CPC) maintains tight control over these fault lines and uses technological surveillance tools to keep the different cultural fragments aligned with Party policies. But as the recent million plus protests in Hong Kong showed, the people have means of organizing and planning while remaining invisible to those tools.
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