This and previous notes can be found at asianmarketsense.com
Check out ERI-C.com for interesting research and trading analysis
This comes from an ERI-C webinar by Mike Howell of Cross Border Capital, its still available to listen to.
Beijing is working to kick the US dollar out of Asia
I was listening to Mike Howell of Cross Border Capital webinar entitled 'Will a skidding dollar finally force the Fed into a near-term tightening taper?'; which is very topical of itself but towards the end he mentions about China working to kick the dollar out of Asia.
Basically he notes that Asian currencies has been relatively stable since 2016 when there was a ‘Shanghai accord’, which was originally secret but later made public; the aim of which was to stem the strength of the US dollar. He thinks from analysing the data that there is evidence of currency targetting. Noting that China would love it if there was was Asian equivalent to the Euro. Then China’s Yuan would be like the Deutschemark within the Euro; he calls it the ‘Yuan in Asian clothing’. It would enable China to heavily influence its currency but escape blame because its currency would be part of a basket.
The driver behind this is that China is undergoing a major financialisation of its economy and is trying to get the Yuan into a position to displace the USD particularly Asia; which is a stated Chinese party goal.
The mechanism it is aiming to use is trade credit. That entails opening up more trade credit markets in Yuan, to try and re-price more goods in Yuan. It is evidenced by the fact China has 32 swap line arrangements with regional and other central banks world wide.
He then asks why would it be doing that if it wasn’t in order to design a trade credit system in Yuan?
This at a time when it is opening up its bond and equity markets to foreign capital and developing its digital Yuan to facilitate peer to peer transfers. Each of which will deminish the role of the US dollar.
A key point being it is not so much the use of the digial Yuan but its architecture because as a leader that technology can be exported to other countries and economies in Asia and central Asia (and I would say Belt and Road Countries globally) who would also be draw into using Yuan pricing), pulling those countries into the orbit of Beijing.
Personally suspect that it is that realisation that has prompted the Fed to say it is looking at a digital dollar. Not because Powell believes in it but to counter and provide an alternative to anything coming out of China. This is an area that China realised the west wasn’t focused on and so is focusing its efforts; similar to the way it managed to dominate 5G.
He then goes on to look what a weaker US dollar means for at asset allocations; basically weak dollar, stronger Asian liquidity and rising European currency which is +VE Asian Equities & Property markets, European bond markets and international commodities. But it would be -VE for the Euro zone recovery and raise internal Euro zone tensions over.
Key for him is that could then be an inflection point for the US dollar and then would have a major impact on monetary policy worldwide.
It makes a lot of sense especially since Trump ‘weaponised’ the US dollar.
The whole webinar is very good and available for free on ERI-C. com It is also possible to get a trial of Michael’s products (Cross Border Capital) they specialise in monitoring and analysing global liquidity flows in order to determine asset prices (currencies, bonds, equities and real estate). If you want more information or are interested in a free trial please let me know.