Tuesday, June 6, 2017

Reuters: China's Capital Controls to Hamper Yuan Internationalization

Reuters runs this article which talks about the difficulty China is running into while trying to gain more international acceptance for the yuan. Below are some excerpts and than some added comments.

"Moves to control capital outflows and concerns over a potential further depreciation of the yuan are likely to impede the internationalization of Chinese currency, Fitch credit rating agency said.

Beijing has announced a string of measures since November to tighten controls on money moving out of the country, including closer scrutiny of outbound investments, large overseas money transfers and individual foreign exchange purchases."

. . . . .

"About 17 percent of China's trade deals were settled in the yuan in 2016, off a peak of 26 percent hit in 2015 and 22 percent in 2014, according to Reuters' calculations based on official data.

Yuan settlements were close to zero in 2009, when internationlization was seen as a way for firms to reduce currency risks and also to challenge the U.S. dollar's role as the world's major reserve currency."

. . . . .

"Data released by the International Monetary Fund in March showed China's share of allocated currency reserves, reported by the IMF for the first time, totaled just over 1 percent, or $84.51 billion."

My added comments: It has really been interesting these past 3 and 1/2 years on this blog following all the various events that could potentially impact the current monetary system which is based on the US dollar as the global reserve currency. 

Despite numerous warnings from both the BIS and the IMF about the instability of the current system, numerous calls around the world for the US dollar to be replaced as the global reserve currency, and seemingly endless predictions that another huge global crisis would soon shake the present system, here we still are with the present US dollar based system.

The research done here has taken me all around the world and has included direct input from some of the best and most knowledgeable experts in the world (in my view). All those experts also have expressed concern over the long term stability of the present system. Some have even proposed potential replacements for the US dollar as global reserve currency. The potential for this to eventually happen is taken quite seriously.

During these last few years we have seen all kinds of news and rumors about banking systems in trouble, banks fined billions of dollars for manipulating markets, central banks implementing incredible money creation schemes never before tried in history, and seemingly never ending debt and derivatives growth around the world. And yet, here we still are under the present US dollar based system.

At this point it is fair to ask, How has all this NOT lead to any kind of major change to the present monetary system so far? 

It's a good question. I don't know all the answers, but I can share what I have learned here in an effort to try and provide some insight if possible. Here is a bullet point list of some of what I think are some key factors I have learned doing research for this blog:

- the tendency to retain the status quo is overwhelmingly powerful even if the status quo has all kinds of problems and issues to deal with. People seem to prefer hanging on to the status quo when the alternative is to plunge into a new unknown world. I don't see this changing much unless a real new major crisis forces it to change. I have learned not to underestimate the power of this factor.

- the completely politically divided world (and especially the US) magnifies the tendency above to hang on to the status quo. Because the US is locked into political gridlock where no one can gain enough influence over the entrenched system to make major changes. All the powerful special interests lined up on each side of the political arena end up having to accept just keeping things pretty much as they are. That is more predictable and safer to operate in than a world where one side or the other starts trying to make major structural changes. 

-the election of Donald Trump has thrown a wild card into all this since it appears he is devoted to making a more serious effort to disrupt the existing power structure than anyone I can recall in my lifetime. However, whether his changes would work or not is of course under intense debate. The entrenched power structure simply does not trust that Trump will make sure their interests are protected or believe the changes he wants to make simply will not work. Either way, they are completely devoted to thwarting virtually everything he attempts to do. This has the effect of a new kind of gridlock in the US. With the US in gridlock, it cannot provide any impetus for any kind of major global change. Until something gives in this enormous power struggle, things seem likely to just stay locked in place despite almost daily uproar in various media aligned with one side or the other.

 -one thing I have learned is that getting consensus to make major changes on any level is very hard these days. People are very divided, they quickly break down into "sides" on most issues, and each side completely distrusts the other side. We can see how hard this makes it in the US to get much done. Just imagine how much harder it is to get anything done at the global level such as at the IMF. There are lots of meetings, studies, and panel discussions on problems and possible changes, but getting enough consensus to move forward with any kind of real plan for a major change on anything is close to impossible from what I have seen. 

If the above is accurate, what does it mean for major monetary system change in the future?

I think it means what we have said here now for some time. Getting any kind of major systemic change is going to be very difficult and most likely a very slow process until and unless some kind of real major new global crisis forces the issue. Clearly, if the present system simply fails due to too much debt, a major derivatives failure that cannot be contained, or some kind of major geopolitical event (major war etc), we will have no choice to but to consider major changes leading to a new monetary system. The "safe" alternative will no longer exist.

The problem we all have is that no one on earth knows if and when such a crisis is going to actually unfold. There are all kinds of possible triggers. As expert after expert has warned, it could literally happen at any time and be totally unexpected. On the other hand, the overwhelming desire to hang on to the status quo discussed above is not likely to diminish any time soon. So long as the officials running the present system can keep it functioning at a level that most people feel confident in, it will likely just continue to plod along. The risk of some untested alternative is likely to feel too great to the existing powers that be, given that events might spin totally out of their control and our centralized system turn into a decentralized one.

All we can do here is what we have done. Make readers aware of the facts as best we can find them, explain the possible triggers for systemic instability, and provide information on various ideas that have already been put forward to try and reform the system if it does fail at some point. We also encourage readers to think through this situation and try to have a backup plan in mind for their own families if the present system were to fail for any reason.

The blog does have a lot of information on all this that will stay available online here for as long as anyone can use it. I still believe the information is important for people to know about and understand even if no major crisis is on the immediate horizon. Also, readers are welcome at any time to send me questions or comments.

Added notes: Here is an article in The Epoch Times titled:

It makes a number of points we have made here on this blog and is worth a read.

This article in The Wall Street Journal illustrates how hard it is to change the status quo

1 comment:

  1. Expect big changes after the Aramco IPO and Shanghai oil RMB futures get up and running.