The Myth of China Dumping US Dollars

Economics, Premium POM13 Comments

Why America Has a Strong Position in the New Bretton Woods Negotiations

By JC Collins

Understanding how balance of payments work is key to understanding the monetary leverage which one country holds over another.  Based on the modern method of money creation, the functionality of balance of payments is really a zero sum game.

Allow me to explain.

The importance of aligning all nations within the same structural central banking framework becomes obvious when the fiat method of money creation is considered. The intent of this post is not to debate the merits and faults of such a system (eg. Fiat money creation allowed for the expansion of the money supply which funded the industrial revolution, but also indebted nations to each other, and in turn, to an invisible web of international banking interests), but to demonstrate the ebb and flow of wealth as it shifts around the world.

As we know here on POM, wealth is defined as the accumulation of human time and labor.

This is why human time and labor is consolidated under ideologies (eg. Socialism, democracy, communism, etc.), which are framed with borders around cultures, religions, and historical significance.  Time and labor are consolidated as a measure of GDP.  World GDP can be considered the total accumulation of human time and labor.

More accurately, world GDP can be considered the measurement by which human time and labor is used to manage the debt which is a product of the money creation process.  This money creation process is practiced by all nations.  As such, the movement of human capital, or resources, being time and labor, is allocated across borders through multiculturalism.  This can also be considered as a form of socioeconomic agriculturalism, or reallocation of human resources.  Much like a farming technique.

But I digress from the original intent of the article.  It happens.

When all GDP is consolidated, we find that the ability to manage debt is allocated by shifting wealth from region to region, or country to country.  The balance of payments is the method of measuring the complexity of the debts of nations.

Let’s explore further.

Every so often we hear that China will dump its holdings of US government debt.  But what isn’t explained is that the People’s Bank of China had to borrow renminbi (sort of, remember all money is created through the issuance of debt) in order to buy that American debt.  This statement alone will bring the article into clear focus for many readers.

Before moving on further let’s consider that there is only finite amount of wealth/debt/human time and labor (let’s call it GWM, Gross Wealth Management) in the world.  The allocation of this GWM is determined by a methodology which we will explore in further detail in another post.  For now we will focus on the balance of payments as the means to measure the GWM ability of countries and the existing international monetary framework.

As such, a deficit in one country will mean a surplus in another.  Balancing the deficits and surpluses between nations is the goal of a multilateral monetary framework.  And considering the debt method of money creation, holding a large surplus is just as detrimental as holding a large trade deficit.

The US government, which has used their domestic dollar as the international reserve asset, was forced to expand dollar denominated debt to meet the demands of the international GWM.  The interesting part of this formula is that other governments and central banks had to print an equal amount of domestic currency in order to purchase that US government debt.

Based on exchange rates, the People’s Bank of China had to create as many renminbi as dollars.  What this means is that the large surplus and USD denominated reserves which China currently holds cannot be considered wealth which is free and clear of debt. China had to borrow renminbi in order to purchase dollars.

When this reality is considered, we can make the determination that China’s large reserves would be useless when used as a financial weapon against America.  Any analysis which is based on such a strategy by China can be considered inaccurate and not considerate of the actual functioning of the international monetary system.

If China so-called dumped their large holdings of US government debt, it would cause massive inflation within the domestic Chinese economy.  How so?  Considering that China used RMB debt to purchase USD debt, once the RMB denominated funds are pulled out of US government debt, these renminbi would flood back into China and cause inflation.  Not to mention that this would hammer the Chinese exporting sector, which is something the Chinese authorities are keen to avoid as they manage the transition from a trade exporting economy to a trade services economy.

Not to mention that China dumping US government debt would only serve to reposition the US deficit by shifting capital flows elsewhere.  Increasing and reducing bond yields would work in tandem with exchange rate adjustments to shift this debt around, like cards in a shuffle game.  Chinese capital flows would shift elsewhere, say the EU, which would than see its own capital flows to the US increase.  It’s only the shifting of the balance of payments.  Nothing more.

The reduction and elimination of reserves altogether is where the international monetary system is moving in the future.

Carrying on.

China can use these large reserves to protect itself from a currency crisis.  The PBoC could sell dollars to support the renminbi, which is something they did several times throughout 2015.  This was completely misunderstood by most, with many headlines, both mainstream and alternative, fanning the flames of false dollar dumping.

China can also use the reserves to protect itself from an external debt crisis.  This is the probable use of the large surplus, as a process of sovereign debt restructuring will begin in the coming months.  The substitution of these reserves within an IMF reserve diversification, or reduction, strategy will benefit China the most.

These reserves also cannot be used by China to address a domestic financial crisis.  For many of the same reasons.

Exchange rate manipulation is one of the only independent means which nations have to influence the ebb and flow of GWM.  It is feasible to imagine exchange rates as the King Rat of international monetary functionality.  This is a strong insinuation of the framework which is used by the international banking interests.

Let’s break this down into more detail.

The PBoC continues to keep the renminbi weak against the dollar for the purpose of purchasing US dollars which are accumulated by Chinese business and exporters.  The People’s Bank of China borrows renminbi in order to purchase these dollars.

Once purchased, the PBoC cannot sell renminbi as it would be inflationary. Same as the US with dollars.  In order to prevent excess inflation, the PBoC issues new debt and raises the required reserve ratio of capital held by Chinese banks.  This has led to the increase of domestic debt within China.

The effect of all this is that the PBoC owes renminbi which it sold at low valuations, based on the exchange rate, and owns dollars at high valuations, based on the same exchange rate.

This is why a substitution and reduction in reserve accumulation is required.  Unless the world completely moves away from the fiat method of money creation, which is something I do not predict happening, the monetary framework will need to be restructured for the purpose of eliminating reserve accumulation and seeking an equilibrium in the balance of payments through some form of multilateral reserve asset.  - JC

13 Comments on “The Myth of China Dumping US Dollars”

  1. JC - I'm confused. I thought US is the only country that issued debt backed fiat. I didn't realize that everyone was doing the same. I thought their treasuries just printed money as much as they wanted. In case of China, I thought they just printed enough Yuan to maintain the peg. If China's fiat is also debt based, then who holds all that chinese debt? Shouldn't the chinese debt be showing up as an asset in other countries' balance sheets?

    Your comments are greatly appreciated.

    Thank you

    1. All countries issue currency through fiat. Some countries do hold small amounts of renminbi. Expect this to grow in the coming months and years as renminbi accumulation increases. The debt is mainly held by the Chinese for now. Which is why the internal debt-to-GDP ratio is over 200%. The goal is to eliminate both surplus and deficits. But that won't change the nature of fiat money creation.

  2. JC, would you think it likely to partially move away from fiat system by implementation of the Overt Monetary Financing system, originally proposed by Milton Friedman and now promoted by Lord Adair Turner.

    Turner is member of the influential G30 group of central bankers:
    http://www.group30.org/members.shtml

    Here is a recent speech in which he promotes OMF:
    http://positivemoney.org/2015/09/qe-for-people-dangerous-drug-or-miracle-medicine-lord-adair-turner/

    I suspect OMF could be part of the debt restructuring process and is already being covertly implemented through QE.

    Also the renewed tests (after Dauphin, Canada) with basic income in Finland and The Netherlands are interesting:

    http://qz.com/437088/utrecht-will-give-money-for-free-to-its-citizens-will-it-make-them-lazier/

    http://www.basicincome.org/news/2015/12/finland-basic-income-experiment-what-we-know/

  3. If restructuring debt can balance the system then all the secrecy is meant to leave those outside the club to lose money and allow club members to make money?

    This means there are is a whole army of disinformation agents running amok. Which shows the fiat system IS a horrible system built on deceit.

    I can only think that this is a desperate act of all or nothing to take over the world. Chips all in!

    JC could the SDR system work fairly for all and keep the world from waging world war if all the fiat was backed by precious metals?

    1. No currency, whether domestic or multilateral/supersovereign, will be fully backed by precious metals. This is the wet dream of precious metals pumpers. Though there could be a partial backing like there was in the early years of the Bretton Woods Agreement. We need to keep in mind that gold is just another tool of the international banking interests.

      Restructuring debt alone will not balance the system. It will take a transformation of the monetary framework along with debt restructuring to balance the system. The elimination of reserve accumulation is the name of the game.

  4. Are you thinking a one world currency or more along the lines of what's been talked about with an Asian Union, European Union and American Union each with its own currency would that be enough to eliminate reserve accumulation?

    1. I would suspect it will be a gradual approach which will require a combination of both strategies, with the global currency being produced as the end product. I still think the EU members will revert back to using their own domestic currencies within the country, but continue to use the euro to balance trade among themselves. This will probably be the blueprint for the next 5 to 10 years. Though there could be some unforeseen events that speed up the process.

  5. May'be your thesis is not working at the moment. If we look at China and Saudi Arabia they are (involuntarily) reducing their US Treasury holdings. Their currencies are not appreciating but are under severe downward pressures. No inflationary forces are at the moment apparent. So maybe other forces are at play at the moment.

  6. "Central Bank Official Touts Membership in London-Based Development Bank"

    "China's joining the European Bank for Reconstruction and Development will also benefit AIIB, central bank official says"

    http://english.caixin.com/2015-12-30/100894520.html

    "Obama to make fifth trip to Germany in 2016"

    The article opens with,

    " President Obama will travel to Germany in April for an industrial trade show and Trans-Atlantic trade talks, a trip that underscores the growing importance of the U.S.-German relationship this decade"

    then goes on to say,

    "The primary purpose of Obama's trip will be to attend the Hannover Messe, the world’s largest industrial technology trade show. He'll be the first U.S. president to attend the 69-year-old trade fair, which attracts about 6,500 exhibitors and 250,000 visitors each year."

    http://www.usatoday.com/story/news/politics/2015/12/30/obama-germany-trip-hannover-trade-fair-angela-merkel-2016/78084822/

    It's interesting that Obama will be the first president in 69 years to attend this trade fair and that the USD reserves began 70 years ago. Add that to the coming reemergence of US exports and it could end up being a pretty good reflection of what we have been discussing here.

    And the TPP would show the preparations for exporting to the Pacific rim or the emerging ASEAN community, China and even India.

    "How U.S. Companies Can Access the ASEAN, Chinese & Indian Domestic Markets Via the TPP Agreement"

    http://www.china-briefing.com/news/2015/11/11/how-u-s-companies-can-access-the-asean-chinese-indian-domestic-markets-via-the-tpp-agreement.html

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