by Nomi Prins
THE BREXIT EFFECT
Prospects for the first post-Brexit G20 meeting were bright for China. The September meeting was a major step toward a reorganization of European cooperation. Concerns about currency markets increased with Brexit in regard to volatility, a rise of protectionism, and more conjured-money policies, as was evident by the Bank of England cutting rates a few weeks after the Brexit vote.
The September 4–5, 2016, G20 Hangzhou meeting was the eleventh G20 meeting and the first to be held on Chinese soil. The schedule included sixty-six events held in twenty different cities in China. China also met with the other BRICS before the Hangzhou event. The goal was to rethink priorities of G20 economies and the way they have been solving the problems of global economic growth. The United States and China were at odds about which nation would reign over that growth.
In general, the United States and China continued to distrust each other through the 2016 US presidential election. The race pitted two candidates, Hillary Clinton and Donald J. Trump, neither of whom was especially warm to China, against each other. China’s trajectory scared the United States, yet the two superpowers had to be pragmatic about finding common ground, if anything because their alliances were up for grabs. That’s why China pressed for the yuan to be included in the SDR and Zhou tried to communicate his brand of monetary policy beyond his prior thresholds. Lagarde and the IMF required his transparency to maintain their own balancing act between the United States and China in the superpower realignment wars.
The PBOC increased its cash injections on September 14, 2016, to a five-month high. The move raised speculation that it was working to steady the Chinese financial markets à la Fed-type strategy.230 The total amount of money provided was RMB 385 billion (US$57.7 billion). It was the highest addition since April. As a consequence, the yuan appreciated, motivated by the inclusion in IMF reserves. That wasn’t all. On September 20, the PBOC announced that the Bank of China New York branch was approved to be the first yuan clearing bank in the United States.231
The moment for which Zhou had been angling for more than a decade had finally arrived. On October 1, 2016, the IMF, historically imbedded in Western monetary protocol, moved to include China’s currency, the renminbi, in its special drawing rights basket of major reserve currencies. IMF leader Christine Lagarde characterized the decision as an “historical milestone” for the “international monetary system” and the “ongoing evolution of the global economy.”232 With its position in the SDR basket, China automatically assumed a more prominent role in global markets.
The PBOC proclaimed the inclusion “a milestone in the internationalization of the renminbi, and is an affirmation of the success of China’s economic development and results of the reform and opening up of the financial sector.”233 Zhou’s work had paid off. As he said on October 7, “We welcome relevant researches and discussions by the IMF on expanding the use of the SDR. China has already published its foreign reserves, balance of payments and international investment positions in both the US dollar and SDR, and the World Bank has also issued SDR-denominated bonds in China. China is willing to work with all relevant parties to promote the international monetary system reform, improve global economic governance, and maintain global financial stability.”234
The United States, not supporting the inclusion to begin with, downplayed it. US Treasury secretary Jack Lew was condescending about the true impact—“being part of the SDR basket at the IMF is quite a ways away from being a global reserve currency,” which to him would require from China more reforms and market liberalization.
Such minimizing of China’s global position would not be up to Lew much longer. For China, the election of Donald J. Trump as US president on November 8, 2016, was a mixed blessing.
He had campaigned against China’s “job-stealing” propensity, which resonated with his voters. Regardless of the rhetoric, as president, he would have to contend with the growth of China as an economic and political superpower and what opposing the multilateral trade agreements would ultimately mean for the hegemony of the United States and the dollar. The more China traded with other countries, the less it would trade with the United States, meaning the idea of Trump securing “better deals” would be unattainable simply because the United States would have reduced leverage. In addition, the more countries would trade with China, the more they would be cutting the United States out of the picture, bit by bit.
YEAR OF THE ROOSTER
On January 17, 2017, President Xi Jinping touted China’s proactive approach on the world stage. In a keynote speech, referencing Charles Dickens’s A Tale of Two Cities, he addressed three thousand elite businesspeople and politicians at the World Economic Forum in Davos.
He urged the world to “rise above the debate” over “fiscal stimulus or more monetary easing.”235 Innovation was the way forward. Protectionism was not. He defended the positive attributes of globalization. “Those who push for protectionism are shutting themselves inside a dark house. They have escaped the rain and clouds outside, but also missed the light and air.” He added, “A trade war will only lead to suffering on both sides.”236
It was an ambitious proclamation given the extent of central bank intervention that had taken place. His message followed eight years of China criticizing the Fed’s cheap-money policy, which had inflated speculative bubbles but had not funded development projects to the extent that China had, regionally and globally.
China’s policy of fiscal stimulus for its domestic economy would continue, but China was preparing for the grander phase—deploying money into lasting global development projects and the political, and possibly military, alignments that came with them. Xi did not mention President Trump by name, but his embrace of globalization and disdain for money being deployed into speculation in the financial markets rather than growth was clear. What the United States wouldn’t do, China would.
On his third day in office, on January 23, 2017, President Trump made good on one of his key campaign promises. He issued a presidential memorandum followed by signing an executive order to “permanently withdraw” the United States from the Trans-Pacific Partnership agreement penned under the Obama administration.237
Because China hadn’t been a part of that major agreement spanning twelve countries and 37.4 percent of global GDP to begin with,238 the US exit meant China would have a freer rein in reinforcing and growing its other regional partnerships absent competition from the United States. China would have more latitude to pursue its broader free trade agreement, the Regional Comprehensive Economic Partnership (RCEP), which spanned sixteen countries, including Japan, almost one-third of global GDP, and almost half the world’s population.239 China stood ready to capitalize on linking with any countries Trump ostracized through nationalism, bombastic style, or broken bilateral agreements, such as Mexico.
President Trump’s Treasury secretary, former Goldman Sachs partner Steven Mnuchin, repeatedly signaled wanting a strong US dollar, whereas President Trump wanted US trade to be more competitive, which meant a weaker dollar. That bipolarity characterized what would become the Trump administration’s global economic policy.
On February 3, the PBOC raised short-term interest rates by a modest 10 basis points, which signaled the possible start of a tightening period.240 China’s export-import growth had rebounded to multiyear highs. The PBOC had repeatedly asked commercial lenders to curb new loans to temper any US-style lending frenzy and reduce financial leverage. It was being careful with China’s future.241
According to a February 14 editorial by Caixin chief editor Hu Shulion, “The shift in tone indicated that while keeping its monetary policy stable, it will lean toward tightening it in order to curb the emergence of asset bubbles and to mitigate financial risks.” He added, “A volatile international economic environment also poses challenges to China’s monetary policy.” US president Donald Trump’s pledge to “revive US trade” made it harder to predict the Federal Reserve’s future policy swings. An
y move by the Fed has a strong effect on the yuan’s exchange rate and China’s capital outflows.242
China’s growth was no longer slowing down. Its position in the world, and ability to finance it, was thus increasing. On April 22, 2017, Zhou addressed the annual spring meeting of the IMF and World Bank in Washington, DC. In his speech, he noted that “China’s economic growth has stabilized” and its “GDP growth in 2016 reached 6.7 per cent, contributing 30 per cent of the global growth.”243 That figure can be compared to the US GDP growth of 1.6 percent and EU GDP growth of 1.8 percent.244
He used the platform to reinforce the threat he saw in asset bubbles and the need for prudent monetary and, implicitly, bank regulation policy. “Going forward,” Zhou said, “the Chinese government will continue to maintain the soundness and consistency of macroeconomic policies. Monetary policy will remain prudent and neutral, striking a better balance between stabilizing growth and the task of deleveraging, preventing asset bubbles, and containing the accumulation of systemic risks.”245
He professed his ongoing support for “the IMF’s work on broadening the role of the SDR, and remarked that he expected more targeted and sustained efforts focused on addressing the inherent weaknesses in the existing international monetary system.” It was nearing a decade since Zhou had first catapulted into prominence by criticizing the US dollar–centric monetary system in the wake of the US-caused financial crisis. His strides, with respect to his own influence and that of China’s, would only increase as the United States conceded its spot on the world stage, whether it wanted to or not.
By the time the twelfth G20 summit kicked off in Hamburg on July 7–8, 2017, China had a solid read on President Trump and his protectionist stance, except when it came to military or territorial disputes. Thus, much of that meeting, though the US media focused on the relationship between Trump and Russian president Vladimir Putin, was really about the accelerated realignment of countries away from the United States. Isolationism is truly a one-way street. Absent a major war, from an economic standpoint, it makes enemies of friends and friends of enemies, depending on resulting realignments born of necessity. In the battle for economic survival and dominion over the future of the global economy, one country’s isolationism would prove another country’s opportunity to forge new relationships with its former partners.
China was pragmatic. Its leaders understood Trump’s role for his four years as president, and, in a way, his isolationist stance drove it to enhance its targeting of US allies for trade. Thus, China approached former US strategic partners like Germany and Saudi Arabia and forged more alliances with Russia. Russian president Vladimir Putin in turn began tending more toward agreements with Germany and China than with the United States. The world was becoming China-Russia-Germany-centric and was poised to continue on that path.
What began as a US bank–instigated financial crisis at the hands of an enabling Federal Reserve manifested in a superpower realignment further fueled by the election of “outsider” Donald Trump as US president. Those events catalyzed a major shift in the prevailing monetary system and superpower hierarchy, propelling China to a leadership role and Xi to epochal status. Trump’s isolationist and protectionist policies only accelerated China’s positioning. It will take decades to realize this shift completely, but looking back from the future, we will one day see clearly how those monetary and financial forces irrevocably altered world order.
Meanwhile, the ongoing escalation of war talk between the United States and North Korea, along with pressure that Trump placed upon China to pick a side, led the People’s Bank of China to tell its banks to stop doing business with North Korea, from the standpoint of ceasing to open new accounts with North Korean customers and winding down existing loans, in support of US economic sanctions against North Korea.246 China did not go so far as to halt trade with North Korea, but it remained on alert for US directives as well as its own interests in the region.
As for the yuan, calls from inside the Chinese government, business community, and the People’s Bank of China itself intensified to “free” the currency from central bank intervention. It was a further sign of the internal battle in China as to how to continue to strengthen its position in the global financial markets. In late September 2017, the China Finance 40 Forum, a prominent circle of national economists, including ones from inside the People’s Bank of China, released a paper advocating for a more free-floating policy regarding the yuan.247 It was a clear sign that the yuan stood ready to take its place as a dominant reserve currency. Adopting such a policy would not mean no central bank intervention because, in practice, central banks existed to protect and defend their currencies, among their other tasks, but it did signal an enhanced internal drive to promote the yuan on the world stage, in a very public way.
In addition, after being the longest-serving major central bank leader, the reign of sixty-eight-year-old Zhou Xiaochuan was coming to an end as he considered his retirement.248 He reigned through a period of three different Chinese presidents and three different US Federal Reserve chairs. Zhou had initiated that free-floating currency process by removing the official peg, or link, that the yuan had to the dollar. His successor would carry that torch.
Elsewhere in the region, Japan remained mired in a precarious allegiance balance between its US ally, its collaboration with China, and securing its own independent future in the rapidly changing global landscape.
4
JAPAN: Conjured-Money Incubator
There aren’t any such things as a quantitative limit or anything, any numbers we can’t overcome.
—Bank of Japan governor Haruhiko Kuroda, March 30, 2016
In the fall of 2008, as the US financial crisis gained steam, the Bank of Japan (BOJ) shadowed the Fed’s policies, including introducing and expanding its supply of dollar funds for use by Japanese banks. The central bank was also cutting rates and increasing the amount of JGBs (Japanese government bonds) it bought in exchange for providing money to banks.1
Two BOJ governors presided over the early-crisis through post-crisis period. The first was soft-spoken Masaaki Shirakawa—a bird-watcher in his spare time.2 He reigned from April 9, 2008, to March 19, 2013. The second was Haruhiko Kuroda, handpicked by prime minister Shinzo Abe for his dovishness. Kuroda took the helm on March 20, 2013, and proceeded to conjure money faster than any other central bank leader—including Ben Bernanke—ever had.
Shirakawa served under an array of six different prime ministers during a frenetic political period in Japan. The shifting of those bureaucratic deck chairs eventually landed Shinzo Abe in the prime minister post for a second run, and with that the end of his career at the BOJ.
Despite acting as central command for monetary policy, the strategies that the Fed perpetuated post-financial crisis were not created by the Fed. The Bank of Japan was the original G7 money conjurer, formulating an early version of quantitative easing in 2001.
In turn, Shirakawa was the major catalyst behind the creation of QE. Kuroda later followed in his tracks to become a long-time advocate of ultra-loose monetary policy.
Japan first used the QE method between 2001 and 2006 in response to a severe financial and banking crisis in the late 1990s.3 The governor of the BOJ at the time was Masaru Hayami, under whose direction the BOJ first set rates to zero (in 1999) and thereafter introduced QE.4 In his last speech about QE before leaving the BOJ in 2003, he said, “In March 2001 the Bank entered uncharted waters by adopting a quantitative easing framework. Commercial banks’ current account deposits held at the Bank were adopted as a main target of money market operations, and ample liquidity has been provided.”5 The amount of liquidity provided under his tutelage would be eclipsed by post-crisis maneuvers.
Later research showed the program had little effect on Japan’s consumer price index (CPI) or inflation levels, which it was designed to boost. But it helped financial institutions in need of cheap money.
Regardless, in November 2008, the Fed began its fi
rst version of quantitative easing (QE1), or large-scale asset purchases, as one of an array of money-conjuring techniques. Under QE1, the Fed created money to buy mortgage assets from ailing big banks.6 According to the St. Louis Fed, one of the twelve banks comprising the US Federal Reserve System of which the Fed is the most powerful and central one,7 “In a nutshell, QE entails unusually large purchases of assets by a central bank financed by money creation.”8 Unusually is the operative word.
THE POINT OF NO RETURN
On February 27, 2008, in his semiannual report to Congress, Bernanke expressed concerns over the US economic situation, the credit and job market, and housing price contraction.9 He promised that the Fed would focus on reestablishing economic activity, leave inflation control as secondary, and keep reducing rates as it had been doing since August 2007.10 Bernanke did so with cautious optimism. “Although the FOMC participants’ economic projections envision an improving economic picture,” he said, “it is important to recognize that downside risks to growth remain.”11
The first shoe was about to drop for Japan. The fifth largest US investment bank, Bear Stearns, was nearing collapse. On March 16, 2008, Henry Paulson, US secretary of the Treasury, defended the Fed’s decision to allow US banking behemoth JPMorgan Chase to buy Bear Stearns, one of Goldman Sachs’s rivals, with government help. “Our financial institutions, our banks and investment banks are very strong,” he said. “I’m convinced that they’re going to come out of this situation very strong.”12 His words were prescient. Big banks did very well after the crisis.