China – The Giant to Bet

This tectonic shift and the economic shockwaves that will result from it will provide is with some of the greatest profit plays they will see in your lifetimes. The China-spawned changes are headed our way.

In 1990, the US banking system was 2.3 to 2.7 times of its counterpart in China. Today, the situation has been reversed and there is much more of an imbalance. China’s banking system has 25 times the reserves of the US Federal Reserve. And that could mean at some point, the US will no longer be able to dictate international monetary policy. At the end of WWII, virtually the entire world functioned on dollars - 100% of the world’s money supply and that figure has dropped all the way to less than a quarter.

Clearly, the greenback has lost its mojo and the US government is losing out its international monetary leverage. On the flip side of it, China’s on the rise economically, while its currency is advancing with the unstoppability of a diesel locomotive operating at a full throttle.

Beijing is taking steps to keep the yuan from being tradeable and knowingly very well that the dollar is increasingly a liability as it minimizes the Red Dragon’s dollar-based exposure. In the last six months, China has signed at least $95 billion in swap agreements, under which it can trade directly with countries for payment in yuan. Those countries sign these deals are getting huge discounts from China in exchange for their participation and for buying goods from China.

In last spring, China organized a meeting in Moscow, attended by Brazil, India and Russia, where the main goal was to supplant the US dollar as the world’s main reserve currency, replacing it with a yuan-led market basket of currencies or even one based on the IMF’s Special Drawing Right (SDR). Today, the SDR consists of the euro, yen, pound sterling and US dollar.

The list of potential implications is very long, including the US dollar goes into freefall. Inflation will strike with a vengeance, as everything bought, sold or priced in dollars will instantly rise in price to offset this fall. It increases repatriation risk and prices throughout the value chains would rise sharply to compensate.
The bottom line – no matter how this plays out, there will always be an upside for investors who are willing to seek it out.