A Smart China

by Kevin Connors

Let’s say you’re in middle school. You were awkward for a few years, maybe even got picked on towards the end of elementary school. But once 6th grade came up you suddenly got some swagger in that step. You started wearing Abercrombie. You got some cool boot-cut jeans and $99 Airmaxs your mom bought for you at Footlocker.

Now you got some confidence, right? At least more than before, that’s for certain. So you wanna start talking to girls. Before, you’d always have to go through your friend–the good looking one who’s good at b-ball and the fly 6th grade honeys are always crushing on. Usually you’d call him up on your iPhone (also purchased by your mom) and tell him you were trying to hollerrrrr at a fly honey.

But now…oh man. Now YOU can just talk to the girls yourself. You put your buddy on the backburner and now HE has competition because your balls dropped, you picked up your skirt, and you just went with it.

Now insert some players here. Your friend is the US, You are China, and them fly chics are the rest of the world.

Let’s take a step back. China’s got some momentum. It’s on the front page of the New York Times or the Wall Street Journal everyday. It’s the world’s 3rd largest economy and Obama even said himself China is of the highest priority of the American people.

But China (You) is like maaaan. I don’t need you Obama. I run this…so they do. They start doing whatever the hell they want. They’re officially atheist so they run around closing churches that become a bit too popular. They manipulate their currency so their goods are cheaper abroad and everyone snatches them up at stores across the Western world. They violate every human rights law in the book. They essentially finance the US wars in the Middle East via purchasing of US treasuries. And after all this they sit back and drink tea because there’s nothing anyone can do about it.

One of the cool things China  is also doing–and the point of this post–is it puts its currency, the Renminbi–in the hands of other countries. Why would they want to do this? And how do they do this?

First, they want to do this because if you’re buying stuff from China you probably want to pay them in Chinese currency. Basically, it’s easier for you if you can just hand China Renminbi when you buy them new Nike Airmax kicks made for $1 and sold for $99. Before, you’d have to go to a bank, exchange your local currency into dollars, then dollars into Renminbi. But China’s got some balls now. So basically they’re slapping the US in the face and being like, “Our country is pretty sweet too, the time of American world economic domination is coming to an end.” And the sad things is…they may be right. Back to our example, you don’t need your friend to hook you up with girls anymore because you got that Abercrombie zip up. You’re cool on your own.

A bit more technical, but HOW they are doing this is pretty cool too. They’re engaging in currency swaps, or more specifically central bank liquidity swaps. China is handing over billions of Renminbi to countries like Argentina, South Africa, and South Korea in exchange for those countries’ own currencies in equal value (so for example, China hands you 10 billion Renminbi, and you hand them the equivalent of that in your local currency). This essentially provides liquidity to these countries so they can now purchase Chinese goods using the Chinese currency–which makes things much easier. Plus, the other half of the swap agreement is that in 10 years, after your country buys a ton of stuff from China and you can self sufficiently provide liquidity in Chinese currency, you swap back with China the same amount at today’s exchange rate. Basically, you’re borrowing Chinese Renminbi, interest free, for ten years at a predetermined exchange rate.

It also makes the Chinese goods cheaper because it subtracts the transaction costs related to going to banks and exchanging currency. Finally, it also insulates the local country (Argentina, South Africa, South Korea, etc.) from fluctuations in the US Dollar–which lately has been getting railed by the global economy.

Strategically, this is really smart on China’s part. When other countries are running around trying to find the definition for a collateralized debt obligation, China’s making it easier for other countries to buy its stuff and, as a byproduct, undercutting the US Dollar’s role in the global economy.

You (China) are now providing your friend (the US) with some competition. How will your friend react? Will he tell all the girls you’re a loser? Will he help you out? Will he act like he’s cool with it but behind the scenes sabotage your ascent to stardom? And the only real question left to ask is, when YOU (China)–the new cool 6th grader–finally sack up and ask an 8th grade fly honey (the rest of the world) to the dance, and your friend (the US)  does at the same time, who will she say yes to?