New American-Sino Monetary and Geopolitical Relations
The empty streets, homes, and commercial spaces of China’s ghost cities are starting to come alive. The vast building of empty cities by Chinese civil and cultural planners over an almost two decade span was considered by most in the West to be an example of overbuilding in a closed economy, an economy which was decades away from functional levels of maturation. Few considered the possibility that China was engineering one of the greatest socioeconomic plans in human history.
Long-term POM readers will remember that this was one of the core themes in the early years of the site. China’s rural population has always been a problematic issue for the policymakers in Beijing. Throughout its history Chinese farmers have repeatedly overthrown their Sino rulers through violent revolution. The benefits of a massive lower class which supports the alternative need for a viable and content middle class.
The plan built around the construction of the ghost cities was that those urban centres would be populated by 100’s of millions of the rural population. Such a massive domestic migration of citizens does not happen over night. But it has started, and the plan is dependent upon another incremental strategy which China has been working on for decades.
The internationalization of the Chinese renminbi has been another topic which we have been discussing since the beginning of POM. China’s currency is most often referenced as the yuan, which is in fact the unit of measurement. The name of the currency is renminbi. The best way to understand the two names is by considering the names used for the British currency, which is also referenced by its unit of measurement, being the pound. The name of the actual currency is sterling, or more commonly used “pounds sterling”.
Chinese monetary authorities have been developing pathways for the internationalization of the renminbi. These have mainly been built around the off-shore renminbi, and less so with the on-shore renminbi. The off-shore provides China a buffer between its domestic markets and potential manipulation from foreign markets. Though China is now slowly beginning to open its domestic capital markets to foreign investment, but only strategically and incrementally so.
At some point in the future the off-shore and on-shore versions of renminbi will be consolidated and the Chinese capital markets will be fully opened to large foreign capital in-flows.
An increase in use of renminbi in the international monetary system and world financial markets will allow China to shift its economy from the existing trade exporting model to a trade services model. One is the manufacturing and exporting of cheap goods which is possible because of the low valuation of the renminbi. The other is the expansion of financial services and products which are denominated in renminbi, such as the recent yuan denominated crude benchmark.
The increasing internationalization of the renminbi, which has picked up pace over the last year, will contribute to the development of a domestic economy structured around consumerism, which in turn creates the need for a vibrant middle class. Whether the developing middle class and consumerism is a direct result of the internationalization of the renminbi, or the growing middle class created the need for enhanced currency internationalization, will have to debated decades from now, when the totality of the plan and all facts have been realized.
The position I have maintained is that Beijing will always be under threat from a large rural population, and as such, the need to internationalize the currency and build a middle class is prominent in all decision making. The internationalization of the renminbi has less to do with replacing the dominance of the USD and more to do with ensuring a stable political environment in China. A stable China aligns with the needs of the international banking interests and the fading Anglo-American establishment.
Chaos in China will not benefit anyone, and all have a vested interest in seeing China succeed with its socioeconomic planning.
The other aspect of renminbi internationalization is its expanded use as a reserve currency. The accumulation of USD in the foreign exchange reserve accounts of central banks around the world has reached epic levels. The first step to correcting this systemic imbalance is the diversification of these foreign exchange reserves. But the ultimate objective would be to eliminate the need for foreign exchange reserves altogether.
It has been my position for years that a reserve diversification away from USD dominance would procede the full reduction and elimination of reserves, with the understanding that China has zero interest in replacing the large accumulation of USD with the large accumulation of RMB.
China has been extremely careful in not allowing its domestic capital and financial markets to be exposed to foreign influence which has been structured around the USD. While it maintained a trading band exchange arrangement with the dollar, the People’s Bank of China was well aware of the threat which existed around total dollar dependence. Though it holds the largest foreign amount of USD denominated debt, the dollar has not been introduced into China’s domestic economy.
Outside of the Special Drawing Right (SDR) of the International Monetary Fund, there has been no supra-sovereign asset which could replace the functional international role of the USD. This has changed with the development and growth of the crypto asset market.
Ripple CEO Brad Garlinghouse recently made a comment during a question and answer session about its digital asset XRP providing the opportunity for connectivity between some isolated domestic capital and financial markets and the larger international markets. Understanding everything we reviewed above can do a lot to bring us a deeper understanding of Garlinghouse’s comments.
Consider that XRP serves as a bridge asset between all fiat currencies and crypto assets. Now consider that China has been expressing interest in XRP and the products provided by Ripple. Products such as xCurrent, and more specifically xRapid, which uses the crypto XRP in its bridge asset function, can facilitate the exchange between fiat currencies, such as the USD and RMB, without the influence of one over the other.
Both the Federal Reserve and the People’s Bank of China have been in communication with Ripple. This should not be considered a coincidence, nor should it be thought that these communications have taken place in isolation and separated from one another. There is a much bigger plan unfolding in the coming months which will allow China to utilize XRP and xRapid to open its domestic markets to foreign capital without the risk of influence from American policymakers, or exposure to USD volatility.
Whether Garlinghouse was referring to China or not will have to be a follow up question. But what is being implemented is likely a new American-Sino Establishment built around the expansion of the crypto market. The Franco-Anglo Establishment was built around the international transition from the franc to the pound. Next came the Anglo-American Establishment which was built around the international transition from pound to dollar. Now comes the American-Sino Establishment, which will be built around the transition from fiat reserves to frictionless crypto asset transactions around the world.
This new establishment will be the first of its kind which isn’t focused on moving and maintaining wealth associated with the spread and debasement of one nations domestic currency. It will be focused on geopolitics as an extension of economic competition and bringing resources to market. Removing the corruption associated with the abuse of domestic currencies from this process will be a first in world history.
Trump has done a lot towards this future by removing the deep state control over North Korea. The ending of the Korean War after seven decades is a monumental achievement which needed to happen in order for other pieces to be positioned. A resolution between Taiwan and mainland China is next in line. These are the geopolitical representations of the monetary transformation taking place just under the surface.
The blockchain services offered by Ripple and the adoption of its XRP crypto asset are much more developed than is widely known or acknowledged. America, as the world’s largest debtor nation, and China as the worlds largest creditor nation, both maintaining the largest trade deficit and trade surplus respectively, will have to agree on the structural framework for a new monetary architecture, or ecosystem. With Ripple providing that decentralized and frictionless service, both nations are on the verge of transforming the world’s monetary and financial realities.
The social credit blockchain grid is descending on China’s ghost cities as the test run for the societies of tomorrow. Transforming 300 million rural pheasants into a vibrant middle class is no small feat. But with worldwide liquidity about to expand on top of the crypto ecosystems, and the seamless movement of value around the world, with no mind to borders, while nations maintain their own unique sovereignty, we can begin to glimpse the first signs of a much bigger future than any of us could have imagined. – JC
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JC Collins can be contacted at firstname.lastname@example.org