Crushed Again by China?

Geo-politics is a zero sum game. The point is not to be better off in absolute terms, but to be better off in relative terms. The winner doesn't have to be better off. All that matters is to be less badly off than the opponent, which explains why war is a popular tool in this respect. It also explains the rational behind the Wuhan flu. The pandemic has created misery all over the world, including China. But because China managed the situation better than other countries, it's now better off in relative terms. The flu has thus strengthened China's position as a global power.

With world hegemony likely to be China's ultimate goal, the next logical step after weakening its opponents would be to strengthen its grip on world trade by making its currency stronger. Doing this would hurt Chinese speculators, but that's irrelevant if it hurts foreigners even more. Especially since local consumers will benefit at the expense of foreign ones if the local currency was to rise. From a geo-political viewpoint, the gamble must look tempting.

The game-plan would be as follows:

1. Strengthen the Yuan by withdrawing liquidity
2. Use the stronger Yuan to buy scarce resources
3. Encourage local consumption by lowering taxes

The result of this will be higher interest rates in China, which will crush Chinese speculators. But foreigners will not be much affected because the increased value of the Yuan will offset much of the fall in prices of Chinese financial assets. If local consumption picks up, the assets may even continue up in value relative to foreign assets. There will be a rush of capital heading for China, propping up the markets as well as the Chinese consumer. The immediate effect will therefore be crushed Chinese speculators, happy foreign speculators, and happy Chinese consumers.

But foreign consumers will be less than pleased. Chinese goods, as well as raw materials of all kinds, will go up in price. There will be rapid price inflation outside China, and the only way to escape it will be to own Yuan, gold or raw materials. The average man in the street will suffer, and so will the dollar, the main target of the strategy.

With the Yuan suddenly the strongest of all currencies, the dollar will be sold together with dollar denominated assets. Not only will the dollar go down relative to the Yuan, dollar denominated stocks and bonds will go down as well.

Artificially strengthening the Yuan will do a lot of damage. But the damage will be greater outside China than inside, and for this reason, it's likely to be China's next step in their dirty war. It's therefore worth noting that China has now taken the first tentative steps down this road. If they don't reverse direction soon, we're likely to see stock market crashes and out of control price inflation all over the world, most severe in the US and least severe in China. Just like the flu, the misery will start in China, but China will be the least affected in the end.

Xi Jinping

By Palácio do Planalto - https://www.flickr.com/photos/palaciodoplanalto/47945730807/, CC BY 2.0, Link