China's Alleged "Victory Plan" Over the US Dollar

Mon, Aug 6, 2018 - 8:56am

Every few months someone promotes complete silliness regarding China displacing the US. Here we go again.

Daniel Lacalle vs Peter Schiff

1. China owns just 6.8% of US Treasuries. Absorbed in days by market.
2. China’s entire gold holdings are less than 0.2% & would be less than 1% of money supply.
3. Yuan is used in less than 4% of global transactions. Impossible with capital controls

— Daniel Lacalle (@dlacalle_IA) August 3, 2018

The winner by a mile is Lacalle. There is no victory for China.

Here are some reasons Lacalle did not mention, but I have mentioned on numerous occasions.

  1. As long as China runs a trade surplus with the US, it will accumulate US assets, primarily US treasuries. The recent instances in which China allegedly "dumped" treasures was, in fact, a move to stop capital flight.
  2. China does not even float the yuan. It is sheer idiocy to promote the yuan as a reserve currency or even a major global currency until it does.
  3. To hold the status of the world's reserve currency, China would have to be willing to run trade deficits instead of seeking trade surpluses via subsidized exports.
  4. The US has the largest and most liquid bond market in the world. China has next to nothing. This is another requirement to having a currency widely held and used in trade.
  5. The US has property rights and human rights that are nonexistent in China. Even if yuan-based bonds existed, who wants to hold them with that backdrop?

Petroyuan Silliness

The twin sister of "Victory Plan" silliness is Petroyuan silliness.

I discuss many of the above ideas in Gold-Backed Petro-Yuan Silliness: Reserve Currency Curse?

Also consider Petroyuan's Crash at Birth.

China is not remotely capable of what Schiff claims and I highly doubt it will be any closer 10 years from now. Chinese banks and SOE are in horrendous shape and the yuan would likely crash if China floated it now.

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