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By Robert Fitzwilson of The Portola Group

November 24 (King World News) - “China’s Frightening Plan To Dominate The World”


The People’s Bank of China dropped a real bombshell this week.  A high level official giving a speech at Tsinghua University indicated that “It’s no longer in China’s favor to accumulate foreign-exchange reserves”.  Already holding close to $1.3 trillion of U.S. Treasuries, you can hardly blame them....


Continue reading the Robert Fitzwilson piece below...  




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Not only have they lost principal value as interest rates have spiked, but the coupon yield is bouncing around 30-year lows.  The other problem has been the relentless increase in the issuance of all forms of credit, including cash, the latter being zero-coupon perpetual Treasuries in our view.  We can’t think of a more unappealing investment.


There was also a hint in the speech that the Chinese are looking more favorably on measured increases in the value of the yuan against other currencies.  It has certainly been a strong performer this year against the currencies of the so-called emerging economies, but this could have been an important signal that they are becoming more confident their economy is able to move away from being primarily dependent upon exports, to a more stable combination of exports and domestic consumption.  This means allowing their currency to appreciate against their external customers and competitors in the developed economies.


The speaker at the conference suggested that more people in China would benefit from a stronger yuan than would lose.  China has a significant problem with inflation.  A sizable percentage of that problem is from imports of energy and raw materials as well as from the impact upon their food production and distribution.  A stronger currency would impact their exporting companies to some extent, but a lower inflation rate would probably have a much more beneficial impact on the population as a whole.


The announcement is also important in that it is another move toward the day that the dollar loses the role as the reserve currency.  The Chinese continue to make strategic moves in that direction.  We have seen them take the form of currency swaps with their trading partners.  We also saw another key announcement this week that the Shanghai Futures Exchange (SHFE) is considering pricing the crude oil futures contract in yuan and the dollar.  The SHFE did not specify whether the Yuan pricing was only for Chinese investors, but the contract itself would be open to foreign investors.  The uncertainty is not from a lack of decisiveness.  These are all seemingly small steps to their ultimate goals.  By making incremental changes, the markets will not notice the historic game of chess being played by China, and the fact that the Chinese are winning.  The West is apparently too dysfunctional to respond with anything but more weakness.


Moving away from the Petrodollar Agreement from the early 1970s would be another severe blow to the dollar’s reserve currency status.  As economic and political power continues to be drawn to the East, these moves along with many others show a deliberate, strategic and very well thought out plan by the Chinese to dominate the economic landscape.  Gaining the mantle of the reserve currency would be a critical step.


The Chinese are making all of the right long-term moves to oust the U.S. Dollar from the reserve currency role.  If they are successful, it will have profound negative effects upon the economies of the Western governments as it will grant immense new powers to the Chinese.


For investors, it is not a question of taking sides.  Mixing politics and investing is never a good idea.  What matters is what makes sense.  Unfortunately for the West, what the Chinese are doing is what makes sense.  They continue to acquire real assets all over the globe.  Their appetite for raw materials such as oil, copper and iron ore continues to be insatiable.  Immense quantities of gold are rapidly moving from the West to China.  Where politically palatable, companies are being snapped up.  We would not be surprised to see that reserves are being reallocated to buying individual equities in the major markets.  All of this makes sense and investors should follow the lead of the Chinese.


There has also been talk in the last week about negative interest rates.  We are not sure if that means for institutional reserves held by the central banks, or for the depositors at those institutions, or both.  In the case of the former, nudging the banks to take the reserves and lend to the economy makes sense.


If it is the latter, that is worrisome.  A hot topic of late has been the “bail-in” concept, whereby depositors are forced to turn over a portion or all of their accounts to recapitalize insolvent banks.  The Cyprus experience with bail-ins was a disaster.  Negative interest rates charged on accounts might be seen as a seemingly less unpleasant way to confiscate funds from account holders than an outright grab.  Given the immense size of the Chinese reserves and holdings of Treasuries, that might also be a factor in China’s thinking to move away from cash and fixed income into specific, real assets.


We are seeing more and more instances of senior strategists concluding that the stock market is going to go higher as it is the only game in town.  Given the testimony by Janet Yellen, it does appear that the Yellen Put is now in place.  As investors shift out of fixed income and cash, there could very well another surge to the upside.  Unless the economy turns around, the surge will be unsustainable as strategists have warned.


For gold and silver, it is obvious that the prices are locked in a very tight range at the current levels.  There have also been warnings that we could soon see another smash in gold by the BIS/Central Banks.  It is impossible to know what the future holds for us, but long-term investors confident in their history, common sense and their outlook should continue to accumulate metals and the miners on declines.


UPDATE - One of Michael Pento’s greatest and most important audio interviews ever has now been released and you can listen to it by CLICKING HERE.


© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.


The audio interviews with Michael Pento, Andrew Maguire, Gerald Celente, David Stockman, Art Cashin, Dr. Stephen Leeb, John Hathaway, Bill Fleckenstein, James Turk, William Kaye, Eric Sprott and Jim Grant are available now. Other recent KWN interviews include Marc Faber and Felix Zulauf -- to listen CLICK HERE.


Eric King

KingWorldNews.com

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