China expresses its monetary policy and its economic diplomacy to end the supremacy of the dollar

China expresses its monetary policy and its economic diplomacy to end the supremacy of the dollar

Something is stirring in the financial and political heart of Beijing. The leaders of the Communist Party of China (PCCh) have been modeling for months, especially since the outbreak of war in Ukraine and the strengthening of geostrategic ties with Russia, far-reaching transformations, both in the economic-monetary sphere and in the fields of diplomacy and defense. A kind of paradigm shift with which Xi Jinping intends to accelerate the economic, technological and military leap that certifies the world hegemony of the Asian giant. The driving lever was embodied in the fourteenth Chinese five-year plan (2021-25) −after the previous extension of his temporary power as head of State and the Army−, taking advantage of geopolitical upheaval generated by the Kremlin with the invasion of Ukraine.

This process of structural reconversion presents several signs of the new Chinese identity. For example, the launch of new special debt issues, a monetary tool that has been used, with palpable financial success, on several occasions. The most recent, during the year 2020, to face the difficulties derived from the first confinements due to COVID-19. And earlier, in the late 1990s, to insulate the yuan from the competitive cross-currency races of Asian tigers that culminated in a regional financial crisis.

Now, its central bank is restoring a tool with which it seeks to get out of the liquidity trap due to the consequences of confinements in large capitals due to the outbreak of infections and the application of the COVID-zero policy, tax cuts to spur an economy of low intensity and by the persistent collateral damage of the Evergrande crisis and the hard landing of its real estate sector. The special debt, unlike traditional sovereign bond issues, is not part of the official budgets, which allows them to avoid being accounted for as a deficit. This idea has already obtained the approval of the State Council, the Chinese cabinet, and the prior approval of the National People's Congress.

With these bonds, Jinping himself intends to spur an economy that is using billionaire resources in infrastructure projects with lower levels of collection and that, at the halfway point of the year, has a difficult time reaching the now unofficial objective of 5.5% annual growth . One of the novelties of the five-year plan is that it does not stipulate a specific goal of dynamism for the first time in the country's recent history.

The declared intention of Beijing is that part of these disbursements to modernize transport, energy, trade and logistics networks be covered by its development institutions, such as the China Development Bank or the one created specifically for initiatives in the rural and agriculture and which they have just provided with an additional line of loans of 120,000 million dollars.

In 2020, more than one trillion yuan −1.4 trillion dollars− were placed with an undoubted sales success, of which some 700,000 million were transferred to local governments to help provide social services during COVID-19 and initiate infrastructure investment initiatives during the de-escalation.

Jia Kang, a former analyst at the Ministry of Finance's research institute, predicts that the 2020 global issue "will serve as a reference" on this occasion, while Larry Hu, an analyst at Macquarie Group in China, highlights the dimension of this financial alternative : it will prevent the budget hole from being between 1 and 2 trillion yuan and its placing on the market will contribute between 1 and 2 percentage points to GDP due to the additional liquidity that the municipalities will enjoy, with a "limited impact" on the capital markets.

The tactic of the Chinese Treasury is not the only key that Beijing has touched, within a growing economic interventionism that analysts and investors criticize and that has been installed over the last year. The China Securities Regulatory Commission (CSRC) has prohibited Chinese companies and investors from sharing confidential data and financial information with foreign regulators since July 25, with a one-year grace period. . Measure that, in the eyes of the market, tries to prevent US supervisory entities from accessing financial and auditing data and from being expelled from Wall Street for it any of the more than two hundred Chinese companies that operate on the Nasdaq and the S&P. 500.

The CSRC's regulatory shift leaves the door open for a "long-term solution" to disputes between Chinese and US regulatory authorities, Ken Cheung Kin Tai, chief FX strategist for Asia at Mizuho Bank, admits in a note to investors. . The shift comes a year and a half after the enactment of the US Foreign Business Responsibility Act, which gives the SEC the power to kick foreign firms off Wall Street if they don't allow their regulators to review audit reports. for three consecutive years.

Yi Huiman, president of the CSRC, affirms that with this measure he intends to avoid false information. The new rule affects 1.7 million investors who, since 2014 and 2016, respectively, can operate in Hong Kong through a stock market connection network from places such as Shanghai or Shenzhen, of which some 39,000 have been very active in the last three years, according to data from the CSRC itself. Yi Huiman also intends with this maneuver to comply with Xi Jinping's order to prevent capital flight abroad, control financial risks and stop financial disruptions among real estate funds.

China has focused its levers of global power in recent years on the challenge of leading the world economic and geopolitical order. It is not a hole card. The Chinese president proclaims it to his fellow citizens from the assumption of his almost plenipotentiary powers with the approval of the great institutions of the State. He too touts it on the international stage alongside the recent unprecedented geostrategic alliance with Russia.

Beijing has forged a solid consensus among the BRICS, the most powerful emerging markets. The club made up of Brazil, Russia, India, China and South Africa − coined by Jim O'Neill in 2001, the year the Asian giant entered the WTO as head of Goldman Sachs Asset Management − has made it a priority to displace the dollar from his monetary domain. The yuan −or its global mercantilist version, the renminbi− will face the struggle with the American greenback after the growing suspicions that both Washington and Beijing seem to agree to the end of the assembly of the globalization of markets and encourage the decoupling of two trading blocksthe one dominated by the US and its related powers and the one led by China, seconded by Russia and which the rest of the BRICS and an uncertain number of developing Asian, Latin American and African countries could join.

China has increased the weight of the yuan as a reserve currency since, in 2016, in the last review of IMF quotas, the Chinese currency became part of the Special Drawing Rights or SDR's, the exchange unit used by this institution. bank to deploy its lines of credit as a lender of last resort. "Its evolution has been disappointing, but it has marked a turning point," says Jeff Halley, an analyst at Oanda, to Business Insider because since then, "the BRICS have managed a plan to defend and catapult one of their currencies" and the yuan has its priority.

The Chinese currency is the only one of the BRICS that does not have a direct exchange rate in the foreign exchange markets, but its convertibility is managed against a basket of currencies, in which the dollar is the essential base, explains Halley. In his opinion, "none of them is a future threat to the greenback due to its undisputed dominance in the markets" because "no investor has yet thought of discarding the dollar and choosing the rand, the real, the ruble, the rupee or the yuan”.

The renmimbi is under the fluctuation band that the central bank of China has set for it. This exchange stability has brought the Chinese currency to be among those treasured by regulatory bodies around the world: 85% of central banks had yuan in their deposits in 2021, according to the UBS survey, four points above the level of the preceding year. The annual survey, carried out between April and June, reveals a gradual face-to-face decline in the American greenback, with 63% of global reserves compared to 69% reached in 2020. “In a multipolar world, the dollar would lose prominence; that yes, to dropper”, they explain in UBS.

China maintains a double race with the US in Asia for commercial and security supremacy in the region. The White House has launched the Indo-Pacific market, which involves the US, Japan and India along with a dozen other Asian nations in promoting trade and investment, within a space that accounts for 40% of world GDP and brings together high-income powers −South Korea, Australia, New Zealand or Singapore− and large emerging markets such as Indonesia, the Philippines, Malaysia, Thailand, Vietnam or Brunei. A move that makes Beijing uncomfortable, just like the military alliance forged by Australia, the United Kingdom and the United States, to which Japan, the fourth member of the Foursquare dialogue, has welcomed, and with which South Korea flirts. "They are pacts aimed at establishing anti-Chinese shields and coalitions in the world," say official Chinese voices.

This conflict has led to the appearance of Henry Kissinger, former Secretary of State under Richard Nixon and architect of the reestablishment of bilateral diplomatic relations between the two superpowers at the beginning of the 1970s. "It is a never-ending conflict that needs to be ended and it is important to understand China if we don't want to light the fuse of a World War II-like catastrophe," he said. For Kissinger, 99, "it is vital, of course, to prevent the hegemony of China or any other global agent", but without the "interference of domestic messages generated in the US".

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