The Upcoming Death of Currency Trading

Aloha from the South China Sea (FREEPOM)

JC CollinsFebruary 23, 2016Cultural, Economics, FREEPOM, Geopolitical, Multilateral Investment Strategies9 Comments

Chinese Capital Outflows and the Buying of American Business Interests

By JC Collins

Early last year the Chinese government threatened the United States with funding and arming Hawaiian independence activists who want to restore the islands’ constitutional monarchy.  The story passed with little fanfare until just days ago when the Chinese made a comparison between setting up defensive arms on the man-made islands in the South China Sea, to the US establishing military facilities on the Hawaiian Islands.

The US State Department was quick to respond with the following:

“I would make note of the fact that Hawaii is a member – or a state [of the United States].”

As opposed to man-made islands which the Chinese have claimed and further developed.

It is accepted fact that the United States acted to overthrow the recognized government of the Hawaiian Kingdom in 1893.  That is the only reason why Hawaii is a member of the United States.  China themselves have even suggested that they could make legal claim on the islands and make the case under international law.

Aside from the legal and political standings of such back and forth accusations, it is readily apparent that the Hawaiian Islands have served as an important military and geopolitical strategic position for the purpose of projecting American interests in the South Pacific.  The islands themselves act as a form of extended barrier and defensive position from which the US Navy can guard the continental United States.

One aspect of the multilateral monetary transition which is not often discussed is the transformation of American geopolitical strategies along with the changes to the military structure to support those new strategies.  As the world shifts further away from a unipolar monetary framework dominated by the US dollar, the need to project American power across the globe will transform into a more regional full-spectrum dominance based on a predetermined Optimum Currency Area.  (OCA’s have been previously covered here on POM in the post The New RMB Managed Peg.)

The new multilateral framework will be structured around a multicurrency exchange rate regime based on the dollar, the renminbi, and the euro.  All three will build towards the future SDR framework, but in the meantime the world will experience shifting balances of power and redefined trade agreements as the account imbalances are corrected.

Whether Hawaii would eventually fall under a renminbi Optimum Currency Area or stay under the North American OCA is difficult to know.  A clue can perhaps be found in the large outflows of capital from China.

Allow me to explain.

Over the last few years China has been loosening the restrictions on outbound capital.  As the largest accumulator of foreign exchange reserves, China will require a more diversified portfolio in order to facilitate the balancing of foreign exchange receivables. This will help offset slowing domestic economic growth at home as Chinese credit markets continue to unwind.  This unwinding is largely attributed to the deleveraging of China’s domestic credit markets from the USD liquidity which has built up as a direct effect of the large accumulation of dollars in the foreign exchange reserves.  This was thoroughly covered in the posts The Myth of China Dumping US Dollars and How China is Deleveraging from the USD.

This outbound capital is looking for better returns then are now possible in China as the credit market contracts and the growth based on an exporting trade model slows further.  This transformation of China’s domestic economy from a trade exporting model to a trade services model based on the internationalization of the renminbi is evident in these outflows.

This transformation of China’s domestic economic model will also see the middle class grow as 100 million of the rural population are moved into the “ghost cities” between now and 2020.  The creation of a consumption focused population will facilitate China’s economic transition.

This Chinese capital is buying into diverse industry sectors such as energy, pharmaceuticals, biotechnology, agriculture, food, entertainment and hospitality, most of which are American based.  Banking and investing are also main targets of this outbound capital as recent Chinese purchases of American banks and the bid to purchase the Chicago Stock Exchange would suggest.

In fact the first two months of this year has seen Chinese purchases of foreign business increase at a dramatic rate.  To date in 2016 there have been 102 mergers and acquisitions based on Chinese outbound capital in an amount of $81.6 billion.  During the same period last year there were only 72 deals worth a total of $11 billion.

This outbound flow of Chinese capital is one of the largest macroeconomic and global trends taking place today. But it isn’t only based on slowing growth in China.

Chinese investors are well aware of the economic growth potential in the United States.  Western analysts and investors are almost completely unaware of the changing monetary dynamics taking place within the international framework.  As we have covered endlessly here on POM, one of the methods of correcting the imbalances within the waning unipolar framework is found in depreciating the US dollar against the currencies of its largest trading partners.

The initial kneejerk reaction to this statement is denial.  But let’s consider that a depreciated dollar is something which both the Federal Reserve and the US Treasury have been outspoken about in the past.  It is the monetary objective in the coming months and years, and may happen sooner than many realize, as covered in yesterday’s post titled  Are the G20 Nations about to Depreciate the US Dollar?.

As total dependence on the US dollar to balance international trade lessons, the demand for dollars will contract.  There will still be a major place for the USD, as the multicurrency framework would suggest, but US monetary authorities will have to implement fiscal and budget strategies which can facilitate the transformation, or re-engineering, of the US dollar to function within a multilateral world.

A depreciated dollar would make American made goods more affordable for the rest of the world.  This will increase US exports and expand domestic job growth as factories start back up.  The imported inflation which would accompany this dollar depreciation will align with the Federal Reserve’s monetary and fiscal mandate to normalize policy by increasing interest rates.

In addition, the realized increase in American GDP because of this expanded domestic growth will realign the debt-to-GDP ratio and bring it back down to manageable levels.  It must be mentioned that the American debt-to-GDP ratio after World War Two was over 140% and stands today at around 104%. The positive effects of a depreciated dollar could see this ratio drop to the 70% to 80% range within the first three years.

Considering all of the above it becomes obvious why Chinese investors see the United States as a great place to invest.  The economic growth in the coming years will be dramatic.  Whether Trump is elected or not, America will become great again.  At least on the domestic economy front.  It would also be beneficial for Americans to invest in domestic companies which will profit from an increase in exports.  This is a sound multilateral investment strategy which should be implemented sooner rather than later.  But pick companies based on low debt levels and large growth prospects.

As mentioned above, one of the areas targeted for Chinese capital outflows is entertainment.  Outside of purchasing the large AMC theatre chain, China has also become heavily invested in Hollywood productions.  As an example, the relationship between Columbia Pictures and China Film Co. Ltd. has been developing for many years already.

American production companies must align with Chinese companies in order to capture the already large and growing Chinese movie audience.  This alignment will help Western films pass Chinese censors and help US production companies capitalize on the annual revenue-sharing import quota slots in Chinese cinemas.

The pro-China slant in recent Hollywood movies is becoming more obvious.  The Columbia Pictures disaster movie 2012 saw the Chinese built arks save humanity.  The movie Salmon Fishing in the Yemen showed the marvels of a Chinese engineered dam.  Yet in the book from which the movie was based, no such dam or Chinese engineers existed.

Positive reflections of China and its Middle Kingdom have been making appearances in Western made movies with increasing frequency.  As with the United States, any transition on the macroeconomic and geopolitical front will be accompanied with a level of subtle propaganda and socioeconomic engineering.

In the Sony Pictures produced film Aloha, audiences are introduced to the concept of Hawaiian independence.  It’s not the focus of the picture, but the subtle insertion of Hawaiian activists in the middle of the film is suggestive of the reference made by China when it stated it would arm and fund such activists.

In fact, real life Hawaiian independence leader Dennis “Bumpy” Kanahele was cast in the movie as the fictional activist leader.  In the movie Bumpy is wearing a shirt which on the front says “Hawaiian by Birth” and on the back it says “American by Force”.  The message is clear.

Bumpy's Shirt

The movie does make a reference to China when it suggests that Chinese hackers may undermine an “innocent” private American capitalist satellite launch.  Later in the film we learn that the “evil” American business man was hiding a secret weapon within the satellite and one of the main characters, not Chinese, ends up hacking the launch and destroying the whole satellite.

The subtle introduction of Hawaiian independence is an example of the socioeconomic engineering and conditioning which takes place in the lead up to fundamental changes on the real world macroeconomic and geopolitical fronts.  The fact that this movie was made and the independence reference was implanted into the film would suggest that a propaganda program to remove American interests from Hawaii has begun.

Readers will also find it interesting that Sony Pictures was involved that same year in the well-publicized North Korean hack.  The evidence that film production companies are deeply involved in national and international affairs has been conclusively proven through hundreds of examples.  The implanting of Chinese geopolitical and socioeconomic interests within the Aloha movie serves as another trend which we can expect to continue as the multilateral monetary transition develops further.

The man-made islands in the South China Sea will project Chinese influence throughout a larger Optimum Currency Area.  This OCA will develop along the lines of the AEC trade agreement of the ASEAN nations.  All of these regions will have to be clearly established and defined in order for the next phase, one of regional currency units, to take place.

Readers should consider the path of the euro as the direction in which common markets and OCA’s will take.  The euro began as a regional currency unit (a basket of European domestic currencies) before being established as an actual currency.

All three major players, being the US, China, and the European Union (Germany) will attempt to expand each of their Optimum Currency Area’s in the lead up to a lock down of weightings within regional currency units.  Once the Middle East is sorted out, this will be the next area of international pressure.

Like Syria and Ukraine, Hawaii is likely to become a hinge point between the old USD dominated monetary framework and the new multilateral transformation.  The coalescing of socioeconomic engineering with geopolitical propaganda is one of the most fascinating things to watch in this changing world.  – JC

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