Why China Trade CANNOT Be Balanced
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2019-09-21 07:00 by Karl Denninger
in Monetary , 219 references Ignore this thread
Why China Trade CANNOT Be Balanced
[Comments enabled]

We need to cut the crap on China folks.

It is not possible, as the Chinese monetary system currently exists and is controlled by the PLA, to fix the trade problems with China.


Leaving aside the problems with the so-called "Chinese Miracle" -- an abject fraud predicated on intellectual property theft, slave labor (including children), environmental destruction and forced technology transfer -- is the fact that China is unique among nations with their own currency systems and central banks.

All open markets and nations with their own currencies maintain one currency.  That is, a Euro is a Euro, a Canadian Dollar is a Canadian Dollar, a Pound is a Pound, a Yen is a Yen and a Swiss Franc is a Swiss Franc.  If I possess Euros I can spend them in Euro nations and their value is inextricably tied to the actions of the government in that set of nations and their economies.

China is alone in this regard; there are in fact two currencies and only one is connected to what China does inside China.  That one, however, is not convertible -- it has no market price as it's worthless both outside China proper and for trade outside of China.

The second is the EXTERNAL currency.

The problem with this is that the PBOC -- the Central Bank -- has absolute control over the interchange.  The external amount of currency available (to do anything outside of China) is extraordinarily small.  This is why the PBOC and Chinese Communist Party can run a ~300+% Debt:GDP ratio with it growing at 10% a year for close to a decade now and not have their currency collapse on world markets from the rampant monetary inflation they have shoved into their "economy" and its extraordinarily unfunded ratio of leverage.

This also means that whenever someone imports something to China from outside the country they get screwed and when China exports something to the US they subsidize it.  They can only get away with this because they can control the interchange between offshore and onshore funds; if the same currency was freely usable both inside and outside China that would never happen as arbitrage would instantly cancel it out; what would be beneficial one way would be detrimental the other in exactly the same proportion.

Finally it is the means by which the Chinese can prevent their citizens from freely exchanging their rapidly-devaluing internal currency for something else, because there is no way to do that other than through the official PBOC channels and the amount of available external currency to do so with and who's allowed to do it under what terms and for what purposes is under strict Communist Party control.

You cannot have a market economy or free and fair trade when one side is preventing free exchange and preventing their own internal perversions from being reflected in the currency beyond their own borders.

You can call that "currency manipulation" if you wish but in fact it's an outright blockade when it comes to trade with the amount of said exchange and its purposes being strictly controlled by the government at all times as to both purpose and amount.  There is no way around it as an external entity and as a Chinese citizen if you try to get around it and get caught you risk prison.

Contrast this with the United States dollar -- if you wish to buy Yen with it, British Pounds, Euros or Mexican Pesos you can.  In fact you can do so at currency exchange counters in most of the international airports in the country -- entirely freely!  When I went to Canada a couple of years ago I could perform that exchange at places near the border in the United States or in Canada, and the market rate fluctuated with the conditions of both nations.  Neither nation gave a wet crap if I wanted to spend $500 US Dollars in Canada; whatever the exchange was as determined by the relative economic strengths of both nations at the instant in time when I did so was the exchange rate; I handed over US dollars and got Canadian ones, which I could then spend in Canada.  Businesses near the border would take US dollars, although as might be expected it was to your advantage (since their "holding time" involved risk) most of the time to go to a bank and do the exchange there, then pay in Canadian money.

The same is true damn near everywhere.

The exception is China.

The United States should embargo China until and unless they drop the dual currency nonsense and allow their currency to float.  They won't do it because were they to do so the value of their currency on the International Market would instantly collapse, and they know it.

Don't fall for the bull**** folks.

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