China’s Exit Strategy Revealed

Chinese Yuan

On Monday, I wrote a bit of a rant about terrorism and the culpability of religion. My point was that while we have achieved a huge amount of technological progress over time, the spiritual progress of humanity has gone nowhere, or maybe even backwards.

I suggested our slavish belief in religion, or at least the organised form of it, was to blame for this lack of progress.

From what I can see, collectively, religion hasn’t made us any better. Is a belief in one God any better than a belief in many Gods, or a belief in a divine ‘spirit’ as practiced by the ancient Stoics? (A very sound philosophy, by the way).

Some readers pointed out that religion wasn’t behind the big murderers of the 20th century — Hitler, Stalin, Pol Pot etc. Fair enough. They committed their crimes under the influence of a fervent belief though, which is how religion works too.

Look, I wasn’t trying to pick on religion. It’s not my beat. I was just raising the idea that maybe religion isn’t the answer to spiritual fulfilment, or more particularly, the spiritual evolution of mankind.

Or if it is, the organised nature of it, and its politicisation, doesn’t lend itself to spiritual advancement.

In that case, what we need is a complete breakdown of religious bureaucracy, and a rebuilding of it from the ground up. Wishful thinking, I know. It’ll never happen.

Maybe the Bible had it right all along. ‘What has been will be again, what has been done will be done again; there is nothing new under the sun.’

In other words, human nature is human nature. We evolve physically and technologically, but not spiritually. Sigh…

Anyway, I’ll shut up now and get back on to a much easier topic — money and economics. But I’m not going to talk about iron ore hitting fresh, multi-year lows and the ramifications for the Federal budget or the Aussie economy. Or interest rates. Or house prices.

There’s a more important development taking place right now, and you need to know about it. The International Monetary Fund (IMF) is set to include China’s yuan in the basket of currencies that determines the value of its ‘Special Drawing Rights’ (SDRs).

‘So what?’ You may think…‘More arcane monetary mumbo-jumbo’. But it’s much bigger than that. This is something you need to know about.

As Jim Rickards writes in the latest issue of Strategic Intelligence:

The list of prominent international monetary elites calling for greater use of SDRs as world money keeps growing. It is critical for investors to understand this new world money. The SDR has the power to reduce the dollar to the status of a local currency no different than the Mexican peso. Investors who understand SDRs can avoid losses from inaction, and profit from new investments that will be created by their use.’

With Jim’s help, let’s try and gain a greater understanding of the SDR.

By the way, Jim probably knows more about SDRs and monetary economics than anyone else in the world. You can gain access to this knowledge here.

Jim devotes his whole latest issue to the topic of SDRs and the yuan’s imminent inclusion to the SDR club, and explains what it means for the international monetary system.

Not surprisingly, the IMF’s agreement to include the yuan is a political one. Back in August, the IMF said that it would take more time for the yuan to join the SDR club. The fact that the yuan was not freely tradable was a major drawback.

But in a nod to China’s political clout, the IMF seems to have come around. The only concession is that the inclusion will likely take place in September 2016. That gives China more time to carry out currency reforms.

Jim believes that the IMF will announce the formal inclusion six months earlier, in March 2016. As he writes in his latest issue:

Market analysts have not identified this March event because it’s buried inside technical language in IMF documents that few on Wall Street understand or even bother to read. This six month gap between the announcement date and the effective date creates a highly interesting and potentially pro table opportunity for you.’

Why the need to see the yuan join the SDR league? If the currency has problems, why let it in?

I hope Jim’s subscribers will forgive me for publishing the following. But I think this knowledge is extremely important for everyone to understand. These events are sometimes so abstract that the layperson misses their significance.

Don’t let the significance of this event pass you by. Over to Jim…

Why the political urgency to include the yuan in the SDR if China does not meet the usual requirements? The answer is that the a new global nancial panic comes closer by the day. These panics happen every ve to eight years almost like clockwork. Look at the nancial panics in Mexico (1994), Russia-LTCM (1998), Lehman- AIG (2008), and you get the idea. Another panic in 2018, if not sooner, is a near certainty.

The next panic will be bigger than the central banks’ ability to put out the re. The only source of bailout cash will be the SDR. But a massive issuance of SDRs will require cooperation by China.  

This is not because of IMF voting (China’s vote is not that large). It’s because SDRs are only useful if they can be swapped for other reserve currencies to prop up banks, and liquidate panicked sellers of stocks. (The IMF runs a secret trading desk where these SDR swaps are conducted.) When your neighbours are in full panic mode, they won’t want SDRs from Citibank, they’ll want dollars.  

Who will swap dollars for the SDRs printed by the IMF? The answer is China. The PBOC and SAFE would love to dump dollar assets in exchange for SDRs. But there’s a catch. China will only engage in SDR/Dollar swaps if the yuan is included in the SDR. China does not want to pay club dues unless it’s a member of the club.

If I understand Jim’s thesis correctly, this is China trying to protect themselves from the massive hoard of US dollars they own as reserve assets. In market parlance, they are massively ‘long’ on the US dollar.

They want to use the next global crisis as a way to offload dollars without crashing their value. But after the dust has settled on the crisis, China’s actions will make it apparent to everyone that the greenback is no longer the undisputed currency king.

In the same way that the dollar challenged the British pound for global dominance after the First World War, so too will the SDR come to challenge the dollar.

If you want a ringside seat to this coming power struggle, you can check out Jim’s work here. He’s the best in the business.


Greg Canavan

For The Daily Reckoning

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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