While Europe and America are proceeding towards their respective train crashes (unpayable governmental debts) China is now quietly proceeding with Plan B as fast as it can.
But what was Plan A? This was the naive belief on the part of the Chinese government in the past few years that they could persuade America by rational argument to take part in founding a new world trading currency. I am, of course, not privy to the details of what the new world currency would be based on. The Chinese Politburo might have conceived it to be based on the free market price of gold. Or on the price of grain. Or on the price of energy. Or on a balanced package of existing national currencies. Who knows? It scarcely matters, so long as it was on a basis that alters only slowly from year to year.
No matter. The US Treasury (the true masters of US financial policy) repeatedly sent the Chinese packing with a flea in their ear. This has been public knowledge for the past two years or so. (The Chinese were probably trying privately for several years previously. In my opinion, ever since Deng Xiaoping’s launched China’s free-market reforms in the 1980s.) Anyway, it looks as though the Chinese have now given up on this hopeless quest. As they watch the printing presses (or digital keyboards) of the US Federal Reserve or the European Central Bank — and many other central banks — churn out more of their national currencies they must be saying to themselves: “Those whom the Gods wish to destroy, They first make mad.”
So what is Plan B? It is to promote the renminbi (yuan) to world class status as a universal trading currency. This would displace the dollar and the euro from their present 55% and 40% duopoly. This has been public knowledge (to the observant) for about two years now, ever since the Chinese government enrolled about a dozen major Western banks, such as HSBC and JPMorganChase as their associates. Their job is to acquire enough renminbi in their cash reserves so they can give credits to any of their customers which are negotiating trade transactions which could be carried out in renminbis. At a higher level, the Chinese government are now making more formal agreements (actual trading floors at both ends) with other governments so they can more directly exchange their national currencies with the renminbi, rather than going through the dollar or the euro as intermediaries (with their risks of daily fluctuations due to speculators).
So far, at various stages of fruition, these arrangements involve Russia, Brazil and about a dozen more countries. After about a year of Plan B, the renminbi accounted for 1% of world trade. A year later, this reached 7%. By now it’s probably at least 10% and heading towards 20%. Given no financial catastrophes in Europe or America (on which China still depends as export markets) then the renminbi will probably reach about 30%, this being the size of the trading market which Chinese firms (governmental and private) presently have — directly — with other emergent countries. Overall, this would then approach the “multipolar” trading currency of something like 30:30:30 (dollars, euros, renminbis) that some economists are already forecasting.
But this doesn’t take into account that the emergent countries already occupy about 55% of world trade and is still growing relative to the advanced countries. Within that, the direct trade between China and the emergent world would also be growing. Within a few years the multipolar currencies could easily arrive at a 20:20:60 ratio. But this also assumes that there’ll be no shocks to the dollar or the euro along the way. If the US Bond market in America, or the Eurozone collapses (either would also trip off the other) then the ratio could become 0:20:80 or 20:0:80 overnight. Or at least within a few days, depending on whether China decides to save America or Europe. Either would probably give just enough export market (in addition to the emergent countries) for China to barely survive. China would not be able to afford to save both (as it is helping to do at present by holding a large part of American government debt) and would have to save one or the other because it, too, would be in desperate circumstances. (My guess is that China would save America and also a German-northern European detachment from the ex-Eurozone.)
I’m sure that China does not have a Plan C as such, any more than America had in the years before the Bretton Woods ‘Agreement’ of 1944 when, as a by-product, it displaced the pound as the predominant world trading currency and replaced it with the dollar. It was “all for the best in the best possible world” as Dr Pangloss would have said. So it would be with Emergency Procedure C. The renminbi would perforce have to take the place of the dollar and/or the euro.
China’s Plan B can’t be avoided. But what about Emergency Procedure C? This could be avoided. Western and European governments could do what the Chinese government always does. This is to establish total control over its banks by insisting on sufficient reserves. In its own inflationary difficulties from time to time, the Chinese government not only adjusts its interest rates but also its banks’ reserves (governmental and private), thus preventing undue credit expansion. American and European governments haven’t done this for 20/30/40 years. They’ve been running on 0% for several years now even though the Bank for International Settlements (the central bank for central banks) has been telling them how foolish they have been. In effect, the banks and the financial sector have been in control. No wonder the credit-crunch finally found them out (that is, both governments and banks). Even now, knowing what must be done, government are still largely only talking about it, with only feeble nods in that direction.