In recent days, the Chinese government’s decision to raise the number of children allowed per household to three has caused a sensation. A choice with clear implications of demographic pragmatism and economic sustainability, which, however, was followed by another in rapid succession. The media, on the other hand, have totally ignored the existence.
For the first time since May 2007, at dinner in fact, it raised the reserve requirements on banks’ foreign currency deposits from 5% to 7% starting next June 15th. Translated, the currency war is making a comeback in a big way. And most importantly, the Dragon has reached the maximum level of acceptance of the appreciation of the yuan.
In fact, institutions will now have to deposit the extra dollars with the PBOC rather than lending or selling those greenbacks for yuan on the interbank market: the authorities are losing patience and have deployed a rarely used instrument, betraying the need to get the situation under control as quickly as possible. But this is only the beginning. Because the move, in itself, appears to be a mere aperitif.
By quantifying currency deposits at around 1 trillion dollars, the banks will therefore have to set aside an extra 20 billion, an operation destined to contract liquidity and force institutions to buy dollars: said fact, depreciating the yuan. But little. Too little, at least after the initial adjustment. And, above all, insufficient to offer an answer to the real dilemma that Covid has caused: how to find a new trade balance on a global level, given the proven impossibility for the United States and China to pursue the same pre-pandemic policy?
Today, in fact, the new normal speak clearly: Beijing and Washington can no longer afford the luxury of letting bubbles swell at the same time. We entered thewas of the alternation China moved first for a single reason: the continuous flows of pandemic support money that are relentlessly entering its financial system, the so-called hot money. Not surprisingly, shortly before the announcement on the change in demographic policy, the Chinese authorities had officially put in place yet another warning against the explosion of bubbles on assets outside their borders but capable of reverberating globally with theirs fall-out.
The Chinese move on currency reserve requirements actually hides an epochal change of pace, a new reality that has forcefully come into play: having become a real economic giant, from now on it appears impossible to coexist two contemporary stimulus policies. Either China plays the reflation card or the US, the support excessive of both subjects is now out of the question. At least, wanting to avoid the expansion of dangerous bubbles on assets and the emergence of a phenomenon of global inflation like the one that the system is experiencing in these weeks, even if still only in sixteenths.
The consequence of this new structure? A zero-sum game. Because both parties respond to a political imperative for economic growth. In short, Joe Biden did not go crazy all of a sudden, effectively clearing the thesis of the virus escaped from the Wuhan laboratory: he is simply sending a message to Beijing, carefully avoiding exaggerating the tones. And, above all, to move from verbal threats to actual facts. In this sense, it is useful to remember as stated by Joe Biden himself last week, speaking at Cuyahoga Community College in Cleveland: “In the coming weeks, my administration will be making decisions and taking action to combat current pressures on the global supply chain, starting with construction materials and bottlenecks. on transport routes. Furthermore, we will follow up on the work we are already doing in relation to computer microchips ». The latter is very clear: we will bring home the production of a fundamental sector such as semi-conductors. In fact, building on the 25 billion investment in the US already announced by the world leader, the Taiwanese TMSC, to build a mega-hub in Arizona. How will Beijing react?
A first move was to put back on track a recipe for currency warfare so drastic in its striking and symbolic being that it rested in the arsenals of the Politburo for 14 years. And there is more. Because in this context, both China and the US need currencies weakened in reflationary mode, but also lower commodity prices: but this can only happen in compliance with a drastic drop in the competitor’s demand for commodities. . Impossible, when the race is precisely that towards continuous and competitive growth, without stopping. In short, theimpasse it begins to become something more: an unprecedented geopolitical and geofinancial hub. It is capable of determining the global equilibrium of the next 50 years, at least. Which, it should be emphasized, today see China clearly ahead of the United States in one of the most qualifying items, as this graph shows: for the first time ever, the annual investments of the Dragon in research and development have exceeded those of the United States ( 501 billion versus 493) and if the trend were to remain the same and settle down, by 2025 the gap between the two powers would widen to a difference of 304 billion (916 billion for Beijing against 612 for Washington).
What solutions, excluding a tariff comparison that would be useless and harmful for both and the apocalyptic epilogue of the direct war confrontation? Only two. First, a new Shanghai deal that avoids an escalation of the currency war, the harbingers of which were clearly revealed by China with its move on foreign exchange reserves. Second, an attempt to encircle and isolate the Asian giant. In this sense and in general silence, in fact, last May 20 the European Parliament has frozen the trade agreement with Beijing signed at the end of the current German presidency (December 2020) as a response to the new sanctions placed in March by the Dragon on European political entities and representatives, including some members of the Sub-committee for Human Rights. An overwhelming majority vote, having counted on 599 yes, only 30 no and 58 abstentions. In short, the process of ratification of the CAI is suspended. Waiting for Beijing to relax. Europe has taken a stand in the ongoing underground warfare. And this graph shows the risk just accepted plastically: having taken a clear position on the Taiwan issue and having signed a pact of cooperation with the US for security in the Pacific area is costing dearly to exports of Australian wine to China mainland. Better to take into account similar epilogues also for European manufacturing and industry, if the confrontation continues.
But net of what consequences there is a risk of having to pay, the importance offered by the media to the Chinese decision regarding the third child per family unit and the grave silence on what emerge as the basis for the construction of commercial, diplomatic and financials of the near future. Including, the choice of the field of Europe.
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