Washington is sanctioning USD dominance’s main benefits
There are two prerequisites for the FED’s miraculous USD operations: the USD can be spent to bulk buy products such as raw materials and energy, which are required for the economy to run smoothly; Secondly, with USD, people can buy necessities at reasonable prices, ensuring their livelihood and social stability. According to data released by the Chinese Administration of Customs on January 14, 2021, the trade volume between China and the United States from January to December in 2020 was 586.721 billion US dollars, up 8.3% year on year. Among them, China’s exports to the US were 451.813 billion US dollars, up 7.9% year on year. Imports from the US reached US$134.908 billion, up 9.8% year on year, resulting in a trade deficit of US $316.8 billion. This shows that USD dominance enabled the US economy to issue a digital record of amount (payable) USD 316.8 billion for receiving products and goods from China. With an additional USD 316.8 billion recorded in the electronic system, China supplied the American economy with a huge number of necessary consumer goods. Given that China’s per capita GDP is around $10,000 per year, $244 of this real output is exchanged for a digitally recorded USD wealth receivable from the US. Real material wealth made in China was exchanged for a virtual wealth, which was handed over to the Federal Reserve to determine its real value. Politically, this Chinese digital wealth is now increasingly sanctioned by Washington to what can be purchased in the US, thus restricting it’s real purchasing power further. (Source)
According to data released by the US Department of Commerce on February 5, 2021, the US trade deficit in 2020 hit USD 678.7 billion due to the impact of COVID-19, up 17.7% from 2019 and a new high since the 2008 international financial crisis. Data also showed that American exports in 2020 decreased by USD 396.4 billion to 2,1319 trillion, or 15.7%, compared with the previous year. Imports fell 9.5 percent, or USD 294.5 billion, to USD 2.8106 trillion from a year earlier. The American trade deficit was 3.2 per cent of gross domestic product last year, up from 2.7 per cent in 2019. In other words, the political chaos, military failure, and economic recession caused by the outbreak of COVID-19 in the US did no harm to the benefit realization of USD dominance, and the much-needed trade balance deficit. Goods imported even increased by nearly 20%. Moreover, China’s trade deficit accounted for 47% of the total trade deficit of the US in 2020, and it was the main contributor to the vested interests of USD dominance. (Source: https://www.sohu.com/a/449098017_120988576) In 2021, China’s contribution to USD dominance is continuing unabated: in the first half of the year, the American trade deficit with China was as high as 165 billion US dollars, and is expected to be over 300 billion US dollars for the whole year again, a similar share of the American entire trade deficit in 2020. (Source)
However, maximising the benefits of USD dominance is a one way street. Politicians in Washington intentionally do not allow Chinese high-tech enterprises or even individuals to actually use their USD wealth to buy mainstream American enterprises and high-tech products made in the United States and beyond, thus limiting the mainland’s digital USD wealth to the purchase of USD bonds and other forms of capital transfer into America. The huge trade deficit of China with America is caused partly by the export ban of high-tech products and technology imposed in Washington. Utilizing the American dominance of press and media worldwide, the United States has turned propagandistic, promoting that China is taking advantage of America and is therefore threatening by systematic competition.
This political maneuver, especially blocking China’s access to technology, is essentially restricting the use of China’s USD income and wealth, with three possible consequences in the medium and long term: First, China’s real economy and individual income in USD continues to grow steadily and rapidly, and it will continue to buy large quantities of raw materials and energy as well as high-end consumer goods utilizing all USD wealth. But high-end technology products made in the United States will lose China’s huge and fast-growing demand. Second, Chinese economic entities and individuals will avoid USD income and transactions as much as possible, thus reducing coverage of USD dominance in the most dynamic economic activities, while Chinese income and wealth grow reliably and steadily. The third possibility is that the crackdown on China will succeed, and the Yuan economy would devolve into tragedy like Libya, Iraq and even Afghanistan. Either of these three scenarios, or a combination of them, would reduce 40-50% of the real trade benefits of USD dominance, and in the worst case, eliminate them entirely. (Source)
Washington is repeating Afghanistan’s mistakes by suppressing China
What is hard for Wall Street as well as Beijing to understand is that if Washington is willing to tolerate even the Taliban in Afghanistan, why should it be so hostile to China’s successful economic and social governance and its huge contribution to USD dominance now and in the future? The world is headed for a “very dangerous place” if Washington and Beijing are unable to stabilize their relationship, former U.S. Treasury Secretary Hank Paulson said in a speech on the second day of the Bloomberg New Economy Forum in Singapore. “Wholesale financial decoupling is impossible, and partial decoupling is likely to make the United States, China and the world more susceptible to financial crises,” said Paulson, who was Chief Executive Officer of Goldman Sachs Group Inc. before becoming Treasury Secretary in 2006. “We need my friend and successor, Secretary Janet Yellen, to continue her communication with Vice Premier Liu He aimed toward transparency, greater harmonization, and coordination of financial regulations and accounting principles,” he said.（Source）
The US launched the Afghan war over 20 years ago in a mood of vengeance, resolve and unity, after al Qaeda’s attacks on New York and Washington shattered the post-Cold War myth of American hyper power. Ironically, Biden’s mismanagement of the withdrawal from Afghanistan underscored his core point — that US visions of forging a functioning nation were illusory and that many more years of US involvement would not make any difference. This encapsulated how top military brass and diplomats were misled by their own preconceptions and the investment of years of US blood and treasure, troops surges, drawdowns, diplomatic offensives and arbitrary timelines to leave. U.S. President Joe Biden said on Wednesday that putting American troops on the ground in Ukraine to deter a potential Russian invasion was “not on the table,” as tension between Moscow and Washington eased slightly after a virtual summit this week. (Source)
In fact, Washington’s current hysteric anti-China decision-making process and motivations are like the decision to send troops to Afghanistan: impulsive and irregardless of the needs and benefits of USD dominance. Three days after the September 11th terrorist attacks, US Congress quickly passed the Military Authorization Act of 2001, which allowed the US to use force against al-Qaeda and the Taliban. In 2002, Congress even passed the Iraq War Authorization Act to launch the Iraq War. Of course, the Republicans had a majority in the House, but the Senate was evenly split. In this far more understandable state than the one now against Beijing, there are no checks and balances in Congress. Even if the Republicans were in the minority, they would still have a supermajority. The public and the media are in a frenzy of revenge, siding with the government. Just as the two wars that profoundly impacted USD dominance, especially the decision to send troops to Afghanistan, were not made wisely at all, the current suppression of China without any immediate causes is unwise. No one in Washington was held accountable for the past decision to invade Afghanistan, and no politicians feel responsible today for the devastating consequences that have lasted for two decades. Military and economic wars are easy to start in Washington, but far more difficult to end.
On Oct. 11th, 2001, days after the United States began bombing the Taliban, a reporter asked then President George W. Bush, “Can you avoid being drawn into a Vietnam-like quagmire in Afghanistan?” Confidently, at that time Mr. Bush replied: “We learned some very important lessons in Vietnam. Perhaps the most important lesson that I learned is that you cannot fight a guerrilla war with conventional forces. That’s why I’ve explained to the American people that we’re engaged in a different type of war; one obviously that will use conventional forces, but one in which we’ve got to fight on all fronts.” The failures in Afghanistan and Vietnam proved to be similar, as did Kabul and Saigon. And the current crackdown on Chinese economic activities, driven by fears of a rising China, will be far more challenging amid the unlimited resources Beijing can mobilize. (Source)
From March 22nd, 2018, to December 18th, 2021, the U.S. Government and its agencies included 611 Chinese companies, institutions, and individuals on the Sanction Entity List.
It is often referred to as the BIS trade blacklist. Of these, 63 were added to the entity list in 2018, 151 in 2019, 240 in 2020 and 157 in 2021 (as of December 18). The U.S. first began issuing the list in February 1997, primarily restricting entities related to weapons of mass destruction, and later expanded it to include those engaged in activities sanctioned or prohibited by the State Department and those that harm U.S. national security and diplomatic interests. Once on the list, you lose trade opportunities in the United States.（Source）
The United States has imposed sanctions on Chinese tech companies, first Huawei, which has overtaken Qualcomm and Apple in cutting-edge receipt chips. The United States is so upset that it has banned TSMC from manufacturing for it, and now SMIC from buying advanced lithography machines. This forces Beijing to invest at all costs to overcome disadvantages in the semiconductor segment, and European executives are now concerned about losing their competitive advantage in 5-10 years. Now America even wants to restrict the maturing process, but that will strain the chip supply chain further and cause more inflation, which has already begun hurting the American economy. The American clampdown on Chinese firms has had an effect of such inflation that the FED has been forced to raise the interest rate. It is clearly also caught in an additional dilemma: it wants to bypass China’s supply chain, but it also finds that India, which it supports, is unreliable and south-east Asia is far too small as an alternative.
These measures are undermining USD dominance covering the current and future RMB economic regions beyond China, causing the entire RMB economy to become more and more decoupled from the USD strategically. Beijing has been sanctioned doing everything possible tying up rival currencies such as the Euro and Yen, and even the Russian Ruble and Iranian oil. Russian and Chinese leaders rebuke US$ in talks at Beijing Winter Olympics. Russia’s Gazprom signed a deal （to be settled in Euro） with China’s CNPC to supply gas via a new route with deliveries of 10bn cubic metres a year over 25 years. (Source: 1 and 2)
One might want to interpret these measures as a retaliation against Beijing for blocking US tech companies such as Google, Facebook and Amazon that have been banned from the Chinese e-commerce market. Google, Apple, Microsoft, and Facebook dominate the global e-commerce space. Indeed, the most innovative parts of the U.S. economy need to expand in China. The problem is that these companies make a lot of money from all over the world, but don’t pay taxes, or provide jobs, and a lot of the money they earn is kept back in the US. Such is the technological hegemony of the US, in addition to the USD dominance, and its economic business model is the unsustainable beggar-thy-neighbor completely. Washington is now doing all it can to squash China and prevent it from overtaking the leading companies in these areas. The logic is similar to the emotional, rather than rational, trade-offs when deciding to invade Afghanistan. The fear is that without technological leadership, the US will not be able to collect a lot of patent and service fees, and the US will lose a lot of revenue. For the sake of many Googles, there is the strategic cost of USD dominance.
Chinese companies’ IPOs in America as direct wealth transfer
IPOs of mainland Chinese companies in the United States are essentially an exchange of the highest quality asset incomes from the Chinese economy, for USD mainly to be spent in the United States for their shareholders’ consumption or investment. They are sales of part ownership of future income in China to investors in the United States, while increasing American national income, amid the USD wealth obtained by their shareholders that is initially stored in bank accounts of the U.S. economy. The majority of this digital wealth will be spent in America, and only a minor part will be transferred back into the Chinese economy.
Especially if these enterprises in mainland China have high debt and high leverage to generate income, such IPOs would imply that equity is transferred offshore, and all debts remain in China. In addition, all shareholder wealth on paper, and exchanged for public ownership, is now valued in USD and becomes part of American wealth, escaping Beijing’s financial oversight. All future trade of ownership of these IPO companies will take place within USD-dominance, while all negative assets, namely debts, will remain in China. The more negative wealth in form of debts that remains there, the more wealth is transferred into America. If Washington fully bans IPOs of Chinese companies in America, it would de facto give up the cheapest and most direct wealth transfer from China into America amid USD dominance. Even if some of the IPOs might be Ponzi schemes or fraud, related IPO trading value only represents a wealth transaction from the left pocket into the right pocket of America, nothing of the capital involved is destroyed.
Let’s take Didi’s IPO as an example. Didi’s IPO is underwritten by Goldman Sachs, Morgan Stanley, JPMORGAN Chase and China Renaissance Capital, and about 7% of the shares are publicly traded, according to public information. Didi plans to use about 30% of the proceeds to expand its business in international markets (thus spent abroad). About 30% of the funds raised will be used to advance technology capabilities in shared mobility, electric vehicles, and autonomous driving (partly spent abroad); About 20% will be used to launch new products and expand existing product categories to continuously improve user experience (spent in China); The remainder may be used for working capital needs and potential strategic investments (partly spent abroad). The majority of IPO revenue will be spent overseas, and future equity transactions will have nothing to do with mainland China, and will take place in USD with all amounts booked and stored in bank accounts within the USD dominance sphere. (Source)
China’s offshore listings clampdown threatens Wall Street. Didi’s switch from New York to Hong Kong suggests US banks may struggle to retain lucrative IPO work.The tectonic shifts for China’s offshore initial public offering market could eat into Wall Street bankers’ fees and handicap American investment banks, analysts and bankers said, as local bookrunners capitalize on their home advantage and European banks exploit worsening US-China ties. One senior banker at a Wall Street group said there was a pressing need to have more bankers based in Hong Kong, predicting that US lenders would face greater competition for deals in China from the biggest local banks. Chinese banks have taken the top spots of the city’s IPO league tables since 2019, according to Dealogic data. China International Capital Corp has ranked first for three consecutive years when excluding so-called homecoming deals by New York-listed companies that start selling shares in Hong Kong. CICC oversaw $2.6bn worth of primary listings in Hong Kong this year, compared with $2bn by its nearest rival Haitong Securities and $1.6bn by third-placed Goldman Sachs. Wall Street banks have long pitched New York to Chinese issuers as a deeper, more liquid market with better analyst coverage. But another crucial draw was higher fees: average returns on deals in Hong Kong, where competition from Chinese lenders pushes down margins, are much lower than in the US. Over the past two years, investment banks have earned about $1.1bn in fees on Chinese companies’ IPOs in each city, despite New York accounting for just $26bn of shares sold in the offerings — less than half of Hong Kong’s $57bn.
Analysts and IPO lawyers said that while a location change would dent fee revenues, Wall Street lenders were likely to remain big participants in Hong Kong, especially on larger deals that rely more heavily on international institutional investors, many of which are based in the US. Homecoming listings have raised more than $33bn over the past two years. About 70 US-listed Chinese companies without a secondary presence in Hong Kong are eligible for them, according to investment bank China Renaissance — accounting for roughly 90 per cent of the grouping’s collective market value. “Those firms already have solid relations with Wall Street banks”, said Bruce Pang, head of research at China Renaissance. “But considering the tensions between the two countries, the smart move may be to choose at least one European bank when they list in Hong Kong.” The head of a large European lender described the Didi delisting as a “stunning reversal of fortunes”, but added that a shift away from New York represented a “substantial local business opportunity for us, so I think this trend is more good news than bad”. However, executives at other financial institutions in Asia doubt that any western banks could capture much new business beyond the wave of homecomings. “The homecomings might see a lot of Morgan Stanley, Credit Suisse and Goldman”, said the head of equities at one Asian stock exchange. “But it’s going to be Bank of China, CICC and Citic winning more IPO business from China” in Hong Kong.
Meanwhile, overseas banks remain virtual nonentities in China’s onshore IPOs, which are dominated by mainland lenders. Chief among these is Citic, the state-owned financial services group that oversaw 17 per cent of a record $65bn in fundraising this year from new listings in Shanghai and Shenzhen, according to Dealogic data. But China’s repeated overtures towards financial liberalization may tempt foreign banks to boost their investment banking ranks in Shanghai to prepare for the day when investors finally have full access to mainland IPOs. “You’re seeing JPMorgan, Goldman and Morgan Stanley saying ‘our pivot is to go directly onshore to China, interact directly with those exchanges and offer customers direct access’”, the equities head said. “It may be that [global] access to China gets reconfigured.” (Source)
In the last several months, the Chinese government has made it harder for local companies to list in the U.S. by requiring additional data security reviews. Meanwhile, Washington is also seeking to tighten restrictions on Chinese companies floating on American exchanges. On Thursday, the U.S. Securities and Exchange Commission finalized rules allowing it to delist foreign stocks for failing to meet audit requirements. The U.S. Securities and Exchange Commission this month finalized rules to implement a law that would allow the market regulator to ban foreign companies listed in the U.S. from trading if their auditors do not comply with requests for information from American regulators. The law was passed in 2020 after Chinese regulators repeatedly denied requests from the Public Company Accounting Oversight Board to inspect the audits of Chinese firms that list and trade in the United States. (Source)
American hedge fund manager Ray Dalio is launching a new China fund through a local subsidiary, according to a report in China’s Securities Times, citing sources. The fund aims to raise more than 3 billion yuan ($468.8 million), according to the report on Tuesday. Dalio’s Bridgewater Associates is the largest hedge fund in the world, with $223 billion in assets under management as of a July 9 filing with the U.S. Securities and Exchange Commission. Over half, or nearly 59%, of those assets belonged to non-U.S. clients, according to the document. Dalio is popular in China and has frequently spoken about investment opportunities in the country. In the wake of Beijing’s regulatory crackdown in July, he encouraged global investors to keep their money in China as an important part of their portfolio, along with U.S. holdings. (Source)
Sanctions on China are sanctions on USD dominance
History repeats itself in Washington, where the American political elite has failed to learn from its past mistakes, particularly its impulsive decision to invade Afghanistan, and its lack of rational decision-making to comprehensively contain and suppress Beijing, without considering and foreseeing existing, future benefits, and the necessary extension of USD dominance.
The Biden administration will place eight Chinese companies including DJI, the world’s largest commercial drone manufacturer, on an investment blacklist for their alleged involvement in the surveillance of the Uyghur Muslim minority. The US Treasury will put DJI and the other groups on its “Chinese military-industrial complex companies” blacklist on Thursday, according to two people briefed on the move. US investors are barred from taking financial stakes in the 60 Chinese groups already on the blacklist. The measure marks the latest effort by US president Joe Biden to punish China for its repression of Uyghurs and other Muslim ethnic minorities in the north-western Xinjiang region. The Biden administration will also consider tightening rules on US companies selling technology to Semiconductor Manufacturing International Corp, the largest Chinese chip manufacturer. The Trump administration put SMIC on the entity list a year ago, but the decision included a provision that critics said created a loophole that some companies had exploited. Eric Sayers, head of the Indo-Pacific practice at consultancy Beacon Global Strategies, said Biden was moving into the implementation phase after reviewing many of his predecessor’s technology policies. “It will be interesting to watch if these targeted but significant steps are just the beginning of a more aggressive approach being driven by the White House or the minimum the inter-agency can muster for now,” said Sayers. “If it’s the former, we could see further restrictions on SMIC and new outbound investment restrictions in the months ahead.” (Source)
In another example of Washington’s escalating confrontation with Beijing over Xinjiang, the US House of Representatives unanimously passed a bill that would ban imports from the region unless companies could prove the goods were not produced with forced labour. The House and Senate earlier reached agreement on a compromise draft of the bill, setting the stage for a vote in the upper chamber of Congress before senators recess for the year-end holidays. The White House welcomed the agreement over the Uyghur Forced Labor Prevention Act. Sophie Richardson, China director at Human Rights Watch, called for Biden to “immediately” sign the legislation after it was passed by Congress. “Beijing and businesses have long banked on a global willingness to put profits ahead of humans’ rights — even in the face of crimes against humanity,” she said. “Congress rightly shifted the burden of proof to Xinjiang authorities and to companies.”
Restricting the mainland’s military high-tech enterprises to carry out normal business activities in the United States and to purchase American products and technologies is in essence a restriction and abandonment of USD dominance. Even printing USD cannot buy the best technological products made in China, and American high-tech enterprises aren’t allowed to occupy the world’s largest and fast growing high-end market, plus all BRI (Belt Road Initiative) regions. The restriction on Huawei’s 5G communications technology and products serves, understandably, the political and military interests of the United States. It makes sense for America, which needs to continue its fully transparent and seamless surveillance and wiretapping of global communications. But restricting China’s military enterprises from carrying out normal business activities in the United States is tantamount to giving up the purchasing power of the USD on the China’s first-class technological products. It is an unnecessary self-restraint and diminishing the benefits of USD dominance.
Take Jingfeng Technology (Edge Medical Robotics), which I am consulting for, as an example. It is a high-tech and innovative enterprise headquartered in Shenzhen that produces minimally invasive remote robotic surgery products like DaVinci. Of course, its technology level is still far behind its pioneering American competitor in Cleveland, but because its products are cheap and already in clinical application, China’s military has been interested in using the remote function of its products, such as asking the first-class medical resources/top doctors in Shanghai and Beijing to help them save the dying in the barracks and even on the battlefield. Many applications of its product and technology by PLA will inevitably lead to the mass production of such high-tech products, accelerate their market success and cash generation to further research and development. In addition, considering the huge demand from the low-end market in mainland China, DaVinci will most likely be reduced to a pure high-end niche player by the competition in the long run, losing the sustainable scale and incremental cash flow necessary for sustaining innovation leadership.
In addition, if Chinese market leaders like Jingfeng are banned from IPO in the United States, leading American competitors such as DaVinci will also not be able to take advantage of Wall Street’s overwhelming competitiveness to acquire companies like Jingfeng. And ultimately leading American companies worldwide today will lose access to the dynamic Chinese market and consequently their future leadership.
China is enjoying USD dominance independently
The total increase of global GDP from 2008 to 2020 is about USD 20,96 trillion, of which 48% is from China, 30% from the United States, and 78% from both combined. China’s growth is 50% more than that of the United States. Of course, this higher growth is not obtained from the US market, and America wasn’t able to benefit from this additional growth. In 2020, China and the US only accounted for 42% of the world’s total economy, and the top 15 economies accounted for 70%. That is to say, the world’s 13 largest economies, excluding China and the US, have almost stagnated. Japan, the third largest economy, saw its GDP drop from $5.45 trillion to $5.05 trillion between 1995 and 2020. Germany, the fourth-largest economy, saw its GDP rise slightly from $3.73 trillion in 2008 to $3.8 trillion in 2020. The UK, the fifth largest economy, will see its GDP unchanged at $2.71 trillion from 2006 to 2020. France, the world’s seventh largest economy, saw its GDP shrink from $2.66 trillion to $2.6 trillion between 2004 and 2020. Italy, the world’s eighth-largest economy, saw its GDP rise slightly from $1.8 trillion in 2004 to $1.89 trillion in 2020.（Source）
Where does this more growth come from? The BRI, launched by Beijing in 2013, was designed to strategically address four major challenges facing China’s economy:
- Excess production capacity and foreign exchange assets.
- China’s oil and gas resources and mineral resources that are highly dependent on foreign countries.
- China’s industry and infrastructure are concentrated in the coastal areas, and it is easy to lose core facilities in the event of external attacks.
- The overall situation of China’s border areas is at its best in history, and neighboring countries are generally willing to strengthen cooperation with China.
After approaching all Belt and Road Economic regions systematically, the number of contracted projects has exceeded 3,000. By November 20, 2021, China had signed 206 cooperation documents on belt and Road co-operation with 141 countries and 32 international organizations, achieving economic growth far higher than that of the West, as led by the United States. (Source)
In a 2013 speech at Kazakhstan’s Nazarbayev University, President Xi urged the peoples of Central Asia to join with his country to “forge closer economic ties, deepen cooperation, and expand development space in the Eurasian region.” Through trade and infrastructure “connecting the Pacific and the Baltic Sea,” this vast landmass, inhabited by close to three billion people could, he said, become “the biggest market in the world with unparalleled potential.”
Since the United States and part of its allies are restricting China’s USD wealth to buy high-tech products, China will use it for independent innovation at home and for infrastructure construction in developing countries alongside BRI regions. Enjoying USD dominance far away from the FED in these countries and regions, and implementing its successful model in the past 40 years there, China has been growing its wealth by utilizing past and future USD income, instead of growing demand and income in the US and other Western countries, particularly those engaged now against China.
The United States as a supplier of raw materials and energy to China
In January 2019, the Trump administration and Beijing signed the 1st phase China-US trade agreement. Given that the Biden administration and the Capitol continue to impose sanctions and suppress Chinese manufacturing because of Xinjiang, China has only implemented less than 50% of the agreement, according to its actual needs and strategic interests. Soybean, lobster, and other products that the US are willing to export to the mainland will face competition from countries and regions whose per capita national income is much lower than US $50,000 to US $60,000. Focusing on such items, it is impossible for America to regain desirable high income manufacturing jobs. Assuming Washington must keep to the premise of free market competition, it is not feasible for China to meet Washington’s politicized trade goals and thus against American job creation needs. As for manufactured goods, including Boeing aircraft, automobiles, medical devices, drugs and industrial machinery, China bought only 60 percent of the promised purchases by the end of October, proving that America is no longer overwhelmingly competitive when it comes to such products. China’s purchases of energy products are only 37 per cent of what it was supposed to buy under the agreement, because Russia, Iran and other Belt and Road countries are lining up to become long-term suppliers to China.（Source）
China’s voracious appetite for natural gas has sparked a wave of deals with US exporters of the fuel, strengthening energy trade between the world’s two biggest economies even as their relationship grows more fraught. The latest sales were announced on Monday when Venture Global LNG, a company building a pair of liquefied natural gas export plants in Louisiana, said it had agreed to two contracts to ship 3.5m tonnes a year of the fuel to state-owned China National Offshore Oil Corporation, the country’s biggest LNG importer. The Cnooc deals bring to seven the number of big contracts signed between US exporters and Chinese customers since October. Some of the contracts last decades. China is poised to surpass Japan as the world’s largest LNG buyer this year, analysts say, while the US will leapfrog Australia and Qatar in LNG export capacity next year, according to its Energy Information Administration. Tensions between Washington and Beijing have escalated over everything from China’s persecution of Uyghurs in Xinjiang and the crackdown on the pro-democracy movement in Hong Kong to its military activity near Taiwan. China has meanwhile accused the US of acting like a hegemon and trying to create a cold war between the powers.
The gas sales, by contrast, are another sign of ties between the two powers on energy and climate issues. The two governments also defied expectations to reach an agreement on addressing climate change at last month’s COP26 summit in Glasgow and have negotiated a joint release of strategic oil stockpiles to cool prices. “The US-China relationship in many respects is at a very low point,” said Jason Bordoff, dean at Columbia Climate School and a former energy official under president Barack Obama. “But energy and climate are a potential bright spot where there can be more co-operation notwithstanding the tension and conflict.”
Venture Global had already signed agreements in November to send 4m tonnes a year of LNG to China’s state-owned oil and gas group Sinopec for 20 years, along with shorter-term agreements totalling 3.5m tonnes with its trading subsidiary Unipec. One of the new contracts with Cnooc is also for 20 years. Mike Sabel, Venture Global chief executive, said China’s efforts to cut carbon emissions by replacing coal with natural gas in power plants was behind the agreements. The Sinopec deal had been timed to deliver a good message before the climate summit, he added. “China is moving faster right now on these new deals than the rest of Asia,” Sabel told the Financial Times. “But as we announce these deals, the rest of the countries will [respond] — and are responding — because otherwise China will get an advantage.” (Source)
The problem is that USD dominance at its core depends on Middle Eastern energy suppliers only accepting USD. If America does not need to import oil and gas from these countries, and becomes their direct competitor at the same time, these Middle Eastern countries will surely be more and more accommodating of Beijing preference in using RMB or Euro for energy trades. In addition, these countries’ daily needs could be more and more satisfied by imports from China. It’s only a matter of time that the Middle East’s energy giants will lose their appetite and preference for using USD in any trade with China. Thus, does Washington really want to only position the American economy as a supplier of mass raw materials and energy to China, and not also as supplier of its high-tech goods and financial services? Washington now needs to follow the FED’s best practices, further engaging and committing Beijing in USD usage, and thus enjoying USD dominance. But instead, Washington is sanctioning Beijing and forcing China away from USD income and usage, killing metaphorical Chinese geese that have been delivering golden eggs over the last four decades, all because of an imaginary threat to American hegemony.
Intel said that a letter circulating online and dated December 2021, in which the American company says it avoids products and labor from Xinjiang, was a note to suppliers regarding its compliance with US law. “To clarify, the paragraph about Xinjiang in the letter is only for expressing the original intention of compliance and legality, not its intention or position,” the company stated in Chinese on its official WeChat account. Intel has apologized for a ban on using components from Xinjiang in response to attacks from Chinese nationalist media over the policy, becoming the latest multinational to become embroiled in China’s battle with the US over human rights issues. The episode quickly became one of the most talked-about topics online in China with netizens on Twitter-like Weibo calling for the government to hit Intel with fines and other punishments. The controversy erupted after Intel sent a year-end letter to suppliers noting that components made in the north-western Chinese region of Xinjiang should not be used in its chips. In a Chinese language social media post, Intel said it wanted to “clarify” that the ban was only for compliance with US law and not its “own intention or position”. “We apologize for the trouble caused to our respected Chinese customers, partners and the public,” Intel added.
China has been Intel’s largest source of revenue for six consecutive years since 2015, as the company is forced by Washington to risk losing its largest market in the world. Intel earned one-quarter of its revenue from customers in China last year and has more than 10,000 employees in the country. It has recently moved to shrink its Chinese operations by selling a memory chip factory to a South Korean chipmaker. (Source)
Chinese wealth is being attracted by rival currencies
Washington’s restrictions on IPOs of Chinese companies are ignoring the fact that Beijing has sufficient capital for continuing its domestic economic growth, and developing the Belt and Road countries and regions. It is an ignorance about the USD dominance needed to continue its coverage of entire BRI regions. Wall Street and USD dominance need to participate on BRI, and not the other way around.
The Euro overtook the USD as the world’s most active currency in September for the first time since 2013 in a ranking of global payment currencies based on dollar value, according to data released by SWIFT on November 19. In September, the Euro, USD, Sterling and Yen were the top four currencies with 37.82%, 37.64%, 6.92% and 3.59%, respectively. This landmark event shows that since the establishment of the Eurozone, it has not only helped countries successfully get rid of their local economy and wealth and dependence on USD; It has succeeded in overtaking the greenback as the currency of choice for settling global trade, favored by economies that have also benefited from a global loss of confidence in the USD. If Beijing is further pushed into a corner by Washington, or there is an extreme event so Beijing must give up use of USD (e.g., being excluded from the SWIFT payments system by sanctions for unifying Taiwan), USD dominance would most likely be reduced to the Five Eyes alliance.
Given Washington’s overall political and economic crackdown on Beijing and inflationary expectations driven by dollar liquidity, the Euro has become an inevitable choice for the world’s second-largest economy. After Beijing adopted my proposal to open China’s sovereign debt market decisively in 2019, RMB government bonds have been sought after by global investors due to their 3-4% interest rate, with the anticipated and actual appreciation of RMB leading to a 5-10% return, and the first-class credit rating of Beijing. Instead of issuing bonds in USD or Euro, Beijing has been able to obtain the hard western currencies they need by issuing bonds in RMB. On November 18th China’s Ministry of Finance successfully issued €4 billion ($1.19 to the Euro) of sovereign bonds. Among them, the 5-year premium issue, 0% coupon, the first for Beijing to achieve a negative interest rate issue. This is the second year in a row that China’s Ministry of Finance has issued Euro sovereign bonds that serve as a pricing benchmark, following the relaunch of Euro sovereign bonds in 2019, Chinese media Brokerage China quoted Samuel Fischer, head of debt capital markets at Deutsche Bank in China, as saying on Nov. 20th that in a sign of its emphasis on European markets, the Chinese treasury issued another euro sovereign bond at the end of the year despite market turmoil in 2020.
The bond issue is the second year in a row, after the resumption of Euro sovereign bond issuance in 2019, and has achieved the lowest yield of sovereign bonds issued outside China so far. Among them, the 5-year premium issue, 0% coupon, was the first to achieve negative interest rate issue. The deal will mainly offer 10 – and 15-year bonds to international investors, as well as five-year bonds for the Hong Kong market, Fischer said. Data shows that the issue of 4 billion euros of sovereign bonds, 5-year 750 million Euros, issue yield of -0.152%; 10 years 2 billion Euros, issue yield of 0.318%; Euro 1.25 billion for 15 years, offering yield 0.664%. According to the Ministry of Finance, international investors, including central banks, sovereign funds, super sovereigns and pension funds, asset management and banks, took up 4.5 times the amount on offer in bookkeeping. European investors ended up investing 72 per cent.
The Fed’s impressive management of exchange rates and interest rates utilizing USD dominance for minimizing borrowing costs currently serve as Best Practices for Beijing. Beijing has no doubt been forced by Washington to take shelter and compete with Wall Street for the world’s floating wealth. The losers of these lucrative deals are American financial institutions in Wall Street, and USD dominance.
BRI regions as sources for sustainable economic growth in China
Mr. Kishore Mahbubani, one of most respected by think tanks in Asia and former UN ambassador of Singapore, reviewed the history: During the Vietnam War, ASEAN supported the United States, and the hostility and distrust between Vietnam and ASEAN were obvious. But after the end of the Cold War, ASEAN brought Vietnam into the region’s economy, helping it become another East Asian economic miracle. The most important lesson Vietnam has learnt from ASEAN is to trade with its rivals – just as the original ASEAN members used trade to overcome their mistrust of each other. That’s why trade between India and Pakistan only tripled from 1991 to 2021, while trade between Vietnam and China increased 6000 times. In short, ASEAN’s culture has brought peace and prosperity.
He suggested that Washington should have a simple vocabulary test. See which words appear more frequently in speeches by US President Joe Biden, US Secretary of State Anthony Blinken, Defence Secretary Lloyd Austin, White House National Security Adviser Jack Sullivan (the “Four Diamonds” of US Indo-Pacific policy): The names of ASEAN and its members, or Australia. The answer is Australia. Washington’s feelings for Australia were genuine and its concern genuine, which goes a long way towards explaining the formation of AUKUS. However, geopolitics is also a brutal business, and emotions lead to competitive disadvantages. If Beijing focuses on ASEAN and RCEP, while Washington focuses on Australia and AUKUS, Washington will fail miserably, according to Mr. Mahbubani.
Why? What really matters is the economy, not the military, concludes Mr. Mahbubani. In 2000, U.S. trade with ASEAN totaled $135 billion, more than three times China’s $40 billion trade volume. By 2020, China’s trade will be $685 billion, almost double the $362 billion of the United States. Washington still views Japan as an economic superpower. In 2000, Japan’s economy was eight times larger than ASEAN’s. But by 2020, it will be only 1.5 times that size. By 2030, Japan’s economy will be smaller than ASEAN’s. The exchanges between China and ASEAN are profound and extensive. China is building high-speed railways in Indonesia, Laos, Malaysia, and Thailand. Surprisingly, Hanoi’s metro system was also built by China. When Southeast Asia was looking for a vaccine, the Chinese vaccine came first. Indonesian President Joko Widodo, an important leader in the region, was happy to receive the Chinese vaccine. There is no doubt that China’s relations with several ASEAN countries are complex and face challenges. But the breadth and depth of the partnership is undeniable.
With ASEAN’s miraculous growth story just beginning, economic ties will be even closer. Many of the region’s economies are on the cusp of becoming middle-class societies. There are 25 million middle-class people in Australia. ASEAN will soon have hundreds of millions of middle-class people. Here’s a leading indicator: In 2020, the value of the ASEAN digital economy was about USD 170 billion. By 2030, it could reach USD 1 trillion. The huge explosive growth of the digital economy in the region will in turn generate new networks of interdependence, further strengthening the massive interdependent ecosystem in the region’s development.（Source）
ASEAN is now China’s largest trading partner, ahead of the EU and the US, which is incredible. There are 500 million people in Southeast Asia, 300 million in the United States and 600 million in the European Union. The per capita GDP of the United States is six or seven times that of Southeast Asia, while that of Europe is four or five times that of Southeast Asia. This shows that the potential for growth amid dependence between China and ASEAN is unimaginable. With such a large volume of trade, and such a high degree of interdependence, comes a need for a huge logistics network to support it. Conversely, with transport and logistics networks, trade can grow faster and bigger. Once the trade volume expands rapidly, it will inevitably drive industrial connections and industrial clusters to move in this direction of further integration.
Regional integration with trade and no infrastructure is incomplete. Only when infrastructure is developed can trade and capital investment facilitation be achieved, and these two facilitations are essentially the unification of rules. If the rules are unified, they can be applied consistently. Therefore, where railways and other infrastructure are hard to connect, rules are easy to connect, and people’s hearts are open to mutual understanding. Once these “three links” are superimposed, ASEAN and China will begin to form the structure of a community of common destiny. All in all, infrastructure plus rules, industries, and cultural exchanges will really make a qualitative difference in the development of the relationship between Southeast Asia and China.
Let’s take Vietnam as an example, for clarity of potential roadblocks hindering the inevitable economic integration of BRI regions. Almost all of Vietnam’s problems enjoying BRI opportunities are due to domestic nationalist sentiment, amid e.g., the South China Sea issue. Vietnam has always refused to give up its sovereignty claims in the South China Sea area, while the United States and Japan are leveraging and encouraging this to contain China. Therefore, Vietnam’s attitude towards BRI has been ambiguous. Unlike India, it is neither explicitly opposed to it, nor actively engaged in it. Many projects have been handed over to Japan, resulting in a long cycle, high cost and low and even no benefits. Vietnam has already suffered many investment losses and setbacks in this regard, and if it continues to do so, it is not impossible that one day it will be overtaken economically by Laos and Cambodia. A simple example is that the Ho Chi Minh City subway in Vietnam was contracted to be built by Japan. After nearly 10 years of construction, it still hasn’t been completed yet. Later, after the Hanoi city subway light rail project was handed over to Chinese enterprises, it took just over three years to finish the reconstruction. It finally went into operation in November 2021, despite a delay of nearly eight additional years due to disputes over the acceptance and handover. Hanoi’s city government opened its subway system for free for half a month, allowing citizens to experience it and changing local people’s attitudes.
ASEAN’s economic friendship with China has become unchangeable. Neither the US Indo-Pacific Strategy nor the US-Japan-Australia Group Blue Dot Network Plan will change that. ASEAN and China’s economic integration process cannot be manipulated by America and its allies, and all sanctions by Washington imposed on China would only force Beijing to invest more USD wealth into this development. ASEAN and China are closer and closer economically, and more and more friendly politically. The general direction will not change, as it also relies on USD dominance in this region.
The Obama era United States initiated a pivot to the Asia-Pacific and tried to pull the association of South-East Asian Nations ASEAN to their side, but almost ten years later, the position of the ASEAN is becoming more and more clear. Although on the surface ASEAN refused to choose sides between the US and China, it has made very clear: don’t expect ASEAN and the United States stand together against China. Singapore, Malaysia, Thailand, and Indonesia almost all share this attitude, because China’s huge domestic demand and unlimited USD capital is the basic condition for sustaining development of Southeast Asia. Without China, ASEAN’s economic growth and prosperity would be unimaginable. (Source)
BRI would become a massive effort to economically integrate that “world island” of Africa, Asia, and Europe by investing well more than a trillion dollars — a sum 10 times larger than the famed U.S. Marshall plan that rebuilt a ravaged Europe after World War II. Beijing also established the Asian Infrastructure Investment Bank with an impressive $100 billion in capital and 103 member nations. More recently, China has formed the world’s largest trade bloc with 14 Asia-Pacific partners and, over Washington’s strenuous objections, signed an ambitious financial services agreement with the European Union. Such Chinese investments of USD wealth, almost none of a military nature, have been prevented by Washington in America, and quickly fostered the formation of a transcontinental grid of railroads and gas pipelines extending from East Asia to Europe, the Pacific to the Atlantic, all linked to Beijing. In a striking parallel with that sixteenth century chain of 50 fortified Portuguese ports, Beijing has also acquired special access through loans and leases to more than 40 seaports encompassing its own latter-day “world island” — from the Straits of Malacca, across the Indian Ocean, around Africa, and along Europe’s extended coastline from Piraeus, Greece, to Zeebrugge, Belgium.
By grasping the geopolitical logic of unifying Eurasia’s vast landmass — home to 70% of the world’s population — through transcontinental infrastructures for commerce, energy, finance, and transport, Beijing has rendered Washington’s encircling armadas of aircraft and warships redundant, even irrelevant.
The FED and the Bank of England have begun shrinking liquidity and raising interest rates. If the United States want to maintain a high valuation of the stock market and to sustain especially needed pension wealth, current foreign wealth stranded in Wall Street and capital flows from oversea must be attracted continuously. In addition, Beijing would now hopefully start to ease its monetary policy and reduce interest rates to stimulate growth in China and consequently the global economy, supporting the FED’s and Bank of England’s tightening efforts. Chief global investment strategist at Charles Schwab Kleintop and Wells Fargo’s Michael Schumacher Schumacher said a positive surprise for markets could come from China ahead of Dec 20th Monday’s trading. “On Monday, we’ll all be watching China with what they do with their loan prime rate. There’s a chance they could cut it,” Kleintop said.“If China is going to re-inflate their economy, that would be a real boost to global growth,” he said.（Source）
Whether USD dominance, which has enabled global growth and prosperity over the past 70 years, will continue to contribute constructively to the global economy and capital markets will depend above all on the strategic wisdom and rational conduct of the FED, and ultimately the Wall Street it represents. Wall Street’s rational judgment and positive recognition of China’s economy are in a parallel world with political elite in Washington. Fortunately, Wall Street ultimately dominates Washington in the United States, which gives the hope to the world for a shared future for mankind.