# CHINA... from Revolution to Revaluation



## MARKETWAVES (30 July 2005)

CHINA:


From Revolution to Revaluation.

by Alex Wallenwein, Editor & Publisher
The Euro vs Dollar Currency War Monitor
July 25, 2005

Lenin and Mao may be dead - but Communism isn't. Living proof: 
China. 

Communist China is the big darling of the world now, with a majority 
of people feeling more favorable toward China than they do toward 
the United States. It is also the big darling of big time 
industrialists, bankers, and world leaders. 

They all court China as if it will be the next world leader - and 
for a good reason. 

What could be nearer to a scheming social controller's heart than a 
successful amalgam of the two most promising human control 
mechanisms ever devised by mankind: Communism - and Capitalism? 

Lest a reader think that the last remark exposes me as a closet 
socialist utopian, let me qualify the word "capitalism" with the 
word "fiat" here, for fiat and central banking are what turn free-
market capitalism into a silly subterfuge, a convenient smokescreen 
for hiding a global drive toward absolute social and economic 
control - one way or the other. 

On that note, *China is as of today the single most successful lab 
rat ever spawned by the ongoing globalist experiment in societal 
engineering that is called "Communism." * 
China, and its North Korean satellite, are the sole survivors of the 
old-guard-communist dry-rot that gutted the Soviet bloc nations 
before and after the iron curtain fell. 

Sure, there are Cuba and Vietnam, but those are firmly lodged in the 
category of "further mentioned" and like the PRNK, are not 
independently viable without China's active or tacit support. Who do 
you think helped Kim Il Jong perfect his rocket boosters to where 
they can now hit the US mainland? 

But that's just to set the background. 

The point is that China still is a communist country, its apparently 
free-wheeling pseudo-capitalism notwithstanding. As already pointed 
out in China's Dirty Trick, its leaders have merely taken the fiat-
capitalist system to its final conclusion (i.e., boundless monetary 
inflation that doesn't show up in price levels for lack of a 
standard to compare things to), thereby having gone much further in 
that direction than the free-floating international system has - 
where currencies must still compete for an appearance of soundness. 

Let that be a warning to those who believe a global fiat system is 
desirable in any shape, form, or fashion. 

In the sixties and seventies, communist China scared the world with 
revolution. Now, it threatens the world financial system with 
revaluation - except that the world isn't scared. 

Ironically - and comically - the world wants China to revalue, and 
applauds China all the way in doing so - without any idea of the 
consequences, as the first two post-reval days of currency and bond 
trading action made only too clear. 

The conventional wisdom out there, to which I once also subscribed, 
is that the yuan is undervalued relative to the dollar and other 
currencies. That may be so in the short run - simply because that's 
what people think. It also may have been that way in the past - 
before the PRC had to print all that currency to buy up dollars 
earned for its exports and turn them into US bonds. 

But as soon as it becomes clear that China has issued way too many 
nonperforming loans, and has printed way too many yuan to buy those 
dollars in the past few years, and accordingly has way too much 
money floating around its economy as a result, that picture may well 
change in the years to come - and dramatically so. 


The Effects - So Far

Judging from today's market action, the Chinese have managed to 
throw a huge monkey wrench into the world market's grinding wheels. 
Nobody knows what's going on anymore. Expert, veteran currency 
analysts see themselves stumped in every respect at the incongruous 
market actions of the dollar and US stock markets in the aftermath 
of the revaluation announcement. 

The dollar was supposed to go down. It went up. 

The Dow was supposed to go up. It went down. 

Treasuries were supposed to suffer. They love it. 

Gold was supposed to rise. It fell. 

Silver didn't know where to go. It was up and down all over the 
screen, but drifting lower on Friday. 

Only oil "obeyed." It went up from $56.72 yesterday to over $58.00 
(NY Crude Futures). Sure, it's early yet, and this picture is most 
likely going to change, but the intended disorienting effect of 
revaluation is certainly apparent - and that despite the whole world 
actually expecting China to move! 

They just didn't quite expect it to happen now, in this way. 

The amazing thing is that seasoned currency analysts are still 
talking about "what if" China now will have less appetite for US 
treasuries - as if last year's cumulative TIC data hadn't shown 
already that China has virtually stopped purchasing them, long 
before. I guess the readership of some gold info outlets isn't quite 
as widespread and influential (or as keen) as I thought. 


Why Did China Revalue?

Not because of US or even EU pressure, that much is for certain. 

Not because it is afraid of world opinion turning negative on China. 
They don't care - and it's actually turning into their favor. 

*Instead, China revalued for two main reasons: (1) The Chinese 
economy keeps chugging and chugging despite central bureaucrat 
measures to try and slow it; it is growing far faster than they are 
comfortable with and needs to be slowed at all costs, and (2) it 
makes it cheaper for them to buy needed imports - like oil. * 

As a side note, a word to the wise: I hope you didn't speculate on 
the revaluation with large sums of your assets. If you did, they are 
now tied up and it has become clear that the slow tempo of 
revaluation will squeeze even the last hopes of windfall profits by 
their necks. 

Letting the yuan rise in forex value makes "China" more expensive, 
thereby reducing demand for Chinese goods. Good times can only last 
so long, and the faster the economy rises, the sooner it will reach 
its limit. Even Chicoms are afraid that the limit is only all too 
near. So, the monster train needs to be slowed down. 

Ordinary restrictive monetary policy is a waste of time in China. In 
an environment where borrowed money is free (because few people care 
about paying it back, knowing they can always get more because of a 
financial system that have never been "in control" and so can never 
go "out of control") nobody cares whether the interest rate goes up 
or not. But making foreigners demand less Chinese goods via yuan 
revaluation just might do the trick. 

It also makes oil (and other imported natural resources) cheaper for 
them, so hey - why not? 

This "slow-the-monster" policy can be observed in action by looking 
at China's refusal to impede wage growth any longer. It used to be 
Chicom policy to not tolerate wage-price rises because they can make 
stuff more expensive and so let on how bad inflation really is in 
the country. It also would have deterred foreign investment by 
outsourcing US companies. 

But, now that the Chinese have already had their chance to swipe all 
of our technology by snooping it up from outsourced production 
plants (and the White House making sure that military use technology 
is just as easily available to them), and now that the Chinese 
economic monster needs to be slowed somewhat - why not? Why not let 
wages rise? 

It makes things Chinese more expensive in relative terms and slows 
foreign demand somewhat. At the same time it improves internal 
consumption by improving workers' disposable income - a problem the 
Chinese have been wrestling with for a while now. 

But Chinese employers haven't woken up to smell the coffee, yet. 
They still think they can get away with offering too little pay, or 
at least less than workers demand, according to this China Daily.com 
article. Now, Chinese workers aren't willing to work for "too 
little" anymore - and the government is no longer stepping in to 
change that, as it. has before. 

The really interesting part of this whole revaluation carnival is 
the automatic adjustment mechanism the Chicoms have built into it. 
Every day, the yuan can trade in a 0.3% band, up or down. The 
following day's opening price will be the middle of that prior day's 
range. This means that - potentially at least - the yuan can rise 
(or fall) 0.15 percent per day, or up to roughly 55 percent per 
year! 

Either case is unlikely to happen, of course, but this potential is 
indeed significant. 

Next, true to their form of keeping the world guessing and hanging 
onto their moving (lying?) lips, they have yet to announce the exact 
composition and weighting of the currency basket they say they are 
now fixing the yuan to. The dollar is likely to play a major role in 
that basket, of course, but there is no hard and fast rule that says 
the Chinese must peg their yuan according to actual trade weights in 
the basket. 


The Dollar Basket-Case

What is rather clear, though, and what hasn't been discussed in the 
press so far, is that the demand for dollars will not just decrease 
by 2 percent or so. That was just their initial adjustment relative 
to the dollar. In future, the "basket" will take over as the value 
standard. 


Trade with the US makes up only one third of China's total trade 
volume. So if trade-weighting is what they have in mind in 
constructing their currency basket - or anything even close to trade 
weighting - then whatever current demand for dollars they still have 
will be cut by two thirds - and that's just over the course of the 
next year, alone!


Since this article is unlikely to penetrate the thick cranial walls 
of corporate America, it will be interesting to observe the shock 
and disbelief with which future TIC data will be received and 
examined by the mainstream financial press. 

In summary, China's journey from revolution to revaluation is far 
from finished. It hasn't even begun, yet. As the world stares, 
mesmerized, eager to trade with China and prop it up to be the next 
world superpower, eager to turn its back on America and welcome a 
future communist superpower in order to "balance" the still 
tremendous influence of the United States, China is gearing up to do 
just that. And the American corporate and political governance crowd 
does everything in its power to help this process along - freedom 
and US national security be damned. 

Revaluation is just one more step in the Chinese game plan, and that 
game plan is a direct extension of Mao's revolution - except that 
the new revolutionaries are wearing Western business suits and drive 
Mercedes and Lexi. 

The really scary thing, however, is that the entire world has been 
turned away from gold as a viable store of value - only the Chinese 
are being encouraged by their government to buy and stock up 
physical gold as a currency hedge. 

It is apparent why the Chinese Leaders want to do that. It ensures 
their national survival in the face of all economic challenges. What 
is less apparent is why all other governments effectively discourage 
their own subjects from owning gold. Is somebody stacking the deck 
in favor of China? 

Boy, will the world have a rude awakening when it begins to smell 
that cup of coffee being brewed up for it! 


Got gold?


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## DTM (30 July 2005)

*Re: CHINA ,,, from Revolution to Revaluation*

Good article.  My brother in law who is a chemicals trader relayed to me from one of his trips was that China was creating internal demand and that they were self sustainable (like we used to be).  He told me that the infrastructure works were massive, and that they couldn't build fast enough. 

This article makes me think that they have built up enough critical mass with their internal demand and are now being able to start letting go of their dollar peg and dollar purchases.  Now they can buy more with their currency to satisfy their own internal  demands.

Interesting times ahead.


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## Aussiejeff (6 August 2005)

*Re: CHINA ,,, from Revolution to Revaluation*

Last night, China's stock market soared by almost 2.5% to end a very strong week...

Here's an interesting slant on what might be happening as a result of the reval...

http://www.safehaven.com/article-3571.htm

I wonder how the balance between a "probably" declining US equities market and a "probably" soaring Chinese equity market will affect our little backwater...? I'm hoping our huge reliance on exporting resources of all descriptions to China (and thus a target for their investment clout) will hold our heads above the lapping waves.. 

Cheers,

AJ


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