Is the Smart Money Betting on China to Win, Place, and Show All at Once?

A financial-sector friend with extensive experience in Europe, Japan and most recently China, and a friend whose judgment I respect, wrote on Saturday that there is “a lot of talk about a strong decline of the USD against the RMB during the middle of next week. This would also hit the Euro to some extent.” He reiterated this from China a day later.

Fanciful as it may appear, I think we can read this from the tea leaves of Wall Street Journal headlines – with little effort – that the dollar will decline significantly this week. The duration of the decline is far less predictable because this will depend on action taken or not taken by major financial powers, and this may mean that the market will be unsettled at least until the G20 meeting in Seoul next month.

Overall, it may not take pessimism to think that the expression “world order” is an oxymoron. The exchange rate regimes of the world clearly do not function to the satisfaction of enough nations even if they put self-interest aside. This is only part of the complex of international relationships that does not measure up to reasonable requirements.

Item #1 (From a WSJ book review): “We have come to accept that the 500-year domination of Asia by the West is coming to an end...”
Item #2: (dateline Beijing): “China’s foreign-exchange reserves swelled to $2.648 trillion at the end of September...”
Item #3 (after China raised interest rates): “ ...(I)t risks intensifying the currency battle.”
Item #4: (Oct. 22, op-ed piece): “Diverging national interests now make an agreement (as in the G-20 response to the 2008-09 crisis) far harder to achieve.” Remember in this context the widespread criticism of Japan’s intervention on behalf of the yen.
Item #5: “Yuan Bonds Find Big Demand.”
Item #6: “Yuan Goes Electronic In Global Market Bid.”

Add to these a few other elements: China’s desire to have a larger share of its trade, especially with Asian nations, settled in RMB; the US and Japanese governments have only a few band aids and baling wire left in their toolboxes to do something about the value of their currencies; political instability looms in Japan and the US and the leaders of the US, Japan and France are suffering from falling popularity; Japan has thus far proven ineffectual in the fishing boat incident affair and territorial conflict; the UK faces the possibility of great economic and social turmoil; a moon shot and strong military buildup provide reminders of China’s assertion of its own strength; the bold demand for access to advanced-nation technology as part of the price of access to the domestic Chinese market; the rare earth metals export embargo; repeated expressions from various persons of fear of protectionism; politicization of Chinese issues in the US Congress and election campaigning...

Of all these, Item #4 may be the most important. If China overplays its hand, it may find that it will rake in a smaller kitty that turns out to be quite naughty and friendly to no one. The give-away seems likely to be whether the US is capable of leading the G20 to a position similar to that of the US versus Japan at the Plaza Hotel years ago. So far, the outlook for this seems dim.

Comments by Staff Economist at Pacific Tax Partners, LLP, are intended for information only and do not necessarily represent the firm. For more information on customized economic reports and tailored US-Japan tax advice that cuts to the chase, contact the staff economists and experienced tax professionals at Pacific Tax Partners:

Terry Wilson

US Income Tax, IRS Tax Appeals

Terry Wilson

Terry Wilson has 25 years expertise in international financial planning and trade issues as well as US income tax and tax appeals.

He is qualified as an MBA and US CPA, Certified Financial Planner, Certified Internal Auditor, Certified Fraud Examiner, and is a Certified Computing Professional.

He is a member of the American Institute of Certified Public Accountants (AICPA), the Finance Club of Brussels at the Bourse, and the Institute of Internal Auditors.

He can be reached at [email protected].

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