The China-Russia partnership just got kicked into high gear with Russia set to launch the first yuan-dominated bond in the next few months.
September 9, 2019
By: Bobby Casey, Managing Director GWP
China has been busy printing money and buying gold, engaging in a precarious game of cat and mouse with the US.
Before Trump threw his hat in the ring for presidency, China was buying up gold.
The last five years, have been particularly active for the People’s Bank of China:
“In the last five years, China’s M2 money supply – a measurement of the money supply that includes cash, checking deposits, and liquid assets – has ballooned 120%. Since the country is being paralyzed by the trade spat and other negative trends that threaten its foundation, China is not showing any signs that it is ready to hit the pause button on money-printing. In fact, judging by previous remarks by PBOC heads, Beijing might rev it up even more, especially if the downturn intensifies.”
The problem is, in these geopolitical stand-offs, private individuals are used as shields on all sides. The US and Chinese governments aren’t at risk… the welfare of their respective constituencies are.
China halted all agricultural purchases from the US; and that isn’t expected to change until after the 2020 election.
That response struck American farmers in the gut. Delinquent farm loans have risen, in some areas higher than they’ve been since 2001. Wisconsin is one such state: a blue state turned red on the promise of making American Farming Great Again.
Wisconsin received the lowest share of farm bailouts, despite the fact that 1 in 9 jobs in that state are tied to its $88 billion agricultural industry.
China has its problems, but desperation begets desperation. So while China is already a dubious actor, now it’s shady and desperate. While the trade retaliation was predictable, the seven reductions in the past 18 months of the reserve requirement ratio was not.
How does a country that largely depends on investment and lending reduce its reserves and print a lot of money while earmarking most of that money for state-owned enterprises? China has nearly 200,000 state-owned enterprises by the way. Will they have enough capital left to actually lend out?
Everyone seems to be holding their breath until the 2020 election and the winner is whoever is left standing. Farmers are filing bankruptcy and committing suicide, so it’s unlikely Trump will receive the same support he did in 2016.
But the democrats can’t manage to find one person who isn’t equally disastrous forward.
One thing is for sure, Trump’s tariffs are driving China further into the arms of Russia:
“China and Russia are accelerating their reduction in reliance on the US dollar, with the Russian Ministry of Finance expected to launch its first yuan-denominated bond by the end of this year or in early 2020. Moscow is hoping that a yuan bond will lift interest by Chinese investors in Russian assets and it would also help to create benchmarks for the setting up of hedging options for rubles and yuan, sidestepping the use of the US dollar.”
- Russia has rid itself of all US Treasuries as of 2018;
- 14% of payments are already conducted in yuan and about 7 to 8% in rubles; China is Russia’s largest trading partner, while Russia is China’s largest supplier of crude oil.
- The Russian central bank has also been gradually substituting its US dollar-denominated assets for yuan assets in its foreign exchange reserves portfolio, purchasing US$44 billion worth of the Chinese currency in the second quarter of 2018, while selling more than US$100 billion.
- Russia held US$67 billion in yuan as of mid-2018, 15 per cent of its international reserves.
The hope is to get more Chinese investors in Russian assets. From there, they could set up hedging options for rubles and yuan which moves them closer toward the goal of circumventing the US dollar.
With this new bond policy in place, expect to see an increase in investments between the two countries as they move closer to establishing a direct yuan-rouble payment settlement plan.
“The Russian yuan-denominated bond will give Chinese investors another investment opportunity after China’s central bank updated rules on the Renminbi Qualified Domestic Institutional Investors scheme last year.This allows Chinese investors to buy yuan-denominated products in overseas markets, as long as yuan investments are not converted into foreign currencies.”
They are working through their roadblocks quickly and methodically. Mixed into this is greater cooperation militarily between the two countries.
China has been accused of being a currency manipulator. Such is the job of every central bank. And China might pay dearly for some of its more untenable policies down the line. But the US government isn’t really paying attention to the Chinese-Russian alliance other than to condemn it in some rhetorical way.
This alliance is a byproduct of a larger global demand for diversification away from the US dollar. JP Morgan put this out there years ago. Even if the US doesn’t lose its first place status, the gap will close between the US and other nations in the coming years.
Currently 85% of all currency transactions involve the USD despite the U.S. accounting for onlyroughly 25% of global GDP.
This is disproportionate. China and Russia will at the very least, along with the EU, even things out to where the US won’t dominate as much of the reserve market. Instead, it will hold much less than
In addition to China, the economies of Southeast Asia, including India, have strong secular tailwinds driven by younger demographics and proliferating technological know-how. Specifically, the Asian economic zone—from the Arabian Peninsula and Turkey in the West to Japan and New Zealand in the East and from Russia in the North and Australia in the South—now represents 50% of global GDP and two-thirds of global economic growth. Of the estimated $30 trillion in middle-class consumption growth between 2015 and 2030, only $1 trillion is expected to come from today’s Western economies.
The EU is tossing around ideas of how to trade oil in euros rather than in dollars, as more nations become weary of US currency hegemony. The kind of sanctions and bullying seen from the US leaves other nations vulnerable to the after effects, and when the US controls so much through its currency, other nations are not exactly free to disagree. A very recent example being Iran.
This sort of behavior lends credence to the introduction of other reserve currencies taking the US’s place, or at the very least a call for greater diversification in the basket share.
China and Russia are creating their own thing. The EU is looking at asserting itself a bit more. While decentralization is preferred, diversification is still better than any one disproportionately dominant force. No country wants to be led by the political winds of another country.
I’m not sure if the White House got the memo, but whenever this trade war ends, things will never go back to the way they were. The world is already making arrangements, and support for the US will continue to wane precipitously long afterward.
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