China Threatens Currency War Retaliation, Warns Japan Against Using China As "Garbage Bin" In Race To Debase

Tyler Durden's picture

About a year ago we warned that in a world devoid of bond vigilantes, long emasculated by the Fed's relentless attempt to bring inflation back or go bust trying, the only forces left willing to stand up to Bernanke are the Brent Vigilantes TM, who succeed in crushing every recent reflation attempt whenever Brent reaches $130 or above (and US gas at the pump rises above $3.80) yet which are rather leery and susceptible to the CME's surprise margin-hike counterattacks, and of course China, the same China which every other lemming said last summer would scramble to join the global reflation except for us, as we made it very clear that all hopes of an RRR or interest rate cut are unfounded. Because all the inflation that China (did not) need would be exported to it courtesy of Bernanke and Company's deliberate and now open-ended printing. For a long time China kept its mouth shut, however, when Japan also joined in this pathological central bank pumping, China may have just had enough. As the WSJ reports,"The president of China's giant sovereign-wealth fund warned Japan against using its neighbors as a "garbage bin" by deliberately devaluing the yen, joining growing international griping about a potential currency war."

Perhaps more important than what is said, is what was unsaid, which is that as the animosity between China and Japan accelerates, this time shifting from purely territorial and political demands, Japan will continue to have no access to the China import market which accounts for over 20% of all Japanese exports. This also means that while the country imports commodity inflation and as the bulk of the Japanese citizens suffer under the weight of a collapsing economy, where the soaring Nikkei only benefits 1%, the conflict with China will get worse by the month: "In unusually strong language, Gao Xiqing, president of China Investment Corp., echoed alarms from Latin America to Europe that the new Japanese government is aiming to boost its exports at other countries' expense via a weaker currency—allegations often leveled at China itself by the U.S. and others."

More from the WSJ on the seemingly endless conflict between China and Japan:

Mr. Gao also expressed skepticism about the prospects of the world economy despite the recent surge in global stock markets, citing persistent structural problems and uncertainties over financial regulations. "Overall, we hold a cautious view of the [global] economy," he said.


He noted that regulators in countries including the U.K. have toughened their oversight of financial institutions and limited bankers' bonuses. "People are not sure about the long-term repercussions of those measures," Mr. Gao said.


With about $500 billion in assets under management, CIC is the world's fifth-largest sovereign fund. It was founded by the Chinese government in 2007 to seek better returns for China's mammoth currency reserves, which had typically been parked in low-yielding securities such as U.S. Treasurys. Chinese leaders have singled out better management of China's $3.3 trillion in foreign-exchange reserves, the world's largest, as a priority for the financial sector.


In the past few years, CIC has significantly reduced its holdings of public securities and accelerated a push into longer-term investments as the fund seeks to shield itself from short-term market swings. The fund's target is to have 51% of its portfolio in alternative assets such as private equity, real estate and infrastructure and the rest in public securities, Mr. Gao said.

However before Japan gets worried that China is only targeting its monetary policies, the truth is that China really is against every other G-7 nation doing just this. And if CIC's Gao was the bad cop focused on Japan, it was China's incoming premier who just did his worse cop impression. Via Bloomberg:

China doesn’t approve of excessively loose monetary policies by other nations, according to a senior government adviser who wrote a book with Li Keqiang, the country’s incoming premier.


“We have already taken a position on this before and China doesn’t approve of some countries’ overly accommodative monetary policy,” Li Yining, 82, a Peking University professor and delegate to China’s top advisory body, said at a briefing in Beijing today when asked about Japan’s recent easing. “This is an act of transferring the crisis to others.”


The remarks may reflect official displeasure over the yen’s depreciation amid Japanese Prime Minister Shinzo Abe’s campaign for more monetary easing to fight deflation. China is “fully prepared” for a currency war should one happen, central bank Deputy Governor Yi Gang said March 1, according to the official Xinhua News Agency.


China can take steps to counter the effects of other nations’ monetary policies such as expediting industrial upgrading and boosting indigenous innovation, Li said, without mentioning Japan in his response. “Given the size of our foreign exchange reserves, we will continue to go out and invest overseas and import more from abroad,” Li said.


Yi said that in terms of monetary policies and other mechanisms, China “will take into full account the quantitative easing policies implemented by central banks of foreign countries,” Xinhua reported March 2.


Speaking in Beijing yesterday, Yi reiterated that he hopes monetary authorities worldwide will adhere to the Group of 20 consensus and avoid currency wars, which “will have no winners.” Finance ministers and central bankers from G-20 nations meeting in Moscow last month sharpened their stance against governments trying to influence exchange rates as they sought to tame speculation of tit-for-tat competitive devaluations.

Leaving aside the hypocrisy that if indeed China is so concerned about soaring inflation, that it could simply hike its currency, oh wait, it can't because it is pegged to the most serial offender of all - the USD, what is becoming clear is that as Chinese inflation is set to take off any minute (the real inflation, not the reported one), the days of global "open-ended easing" are now numbered, because while the distraction of "growth" in the US and Europe may have fooled some people, some of the time, absent China - the world's most important marginal economy - going all in in credit creation, and thus "growth", global GDP will not rise. And the longer Bernanke and Co., create hot money which finds its way almost instantly into Chinese real estate and keep Chinese property prices soaring, the shorter the time until China finally says "no more" and forces the G-7 to pull the plug on the global reflation which at this rate will lead to the same social instability that rocked China in early 2011.

As for China entering the currency wars - perhaps in a world hypnotized by the endless nightly algo-driven risk levitation, in which nothing can ever go wrong again, this may be just the cathartic event so very needed to get some true price discovery in what has become a global experiment in reflexive asset-price fixing, which is then expected to feedback into the underlying economy: a process which has failed for four years in a row, and is why the central banks are getting so desperate, they have collectively now gone all in.

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BigInJapan's picture

Currency war?

Sheeyit, we've got a hot war coming right up.

Dr. Sandi's picture

China has hundreds of millions of young men ready for action.

Japan has tens of millions of grandparents ready for fresh diapers.

What kind of war are we to expect?

GetZeeGold's picture



Maybe they'll let the aging Japanese grandparents move to the ghost cities and let China use Japan as a garbage bin. Seems like problem solved there.


If anyone has a better idea....I'd love to hear it.

Popo's picture

"joining growing international griping about a potential currency war"

LOL?   Potential?   The currency war has been in full swing for a few years now.   Bush was calling China a "currency manipulator" back in 2006.  What was that other than a currency war?  Bernanke has been trashing the dollar since 2008.  What was that other than a currency war?

The Yen is getting taken to the woodshed and we're still talking about a "potential currency war?"

What the fuck do these idiots think a currency war looks like?  We're in the middle of one, and we have been for years.    

whotookmyalias's picture

At least they have their miracle tree.  Well, it's not really alive, they cut it down and preserved it and put it back up so it would look miraculous.  But they have it.

BigInJapan's picture

Yeahhhhh . . . buttttttt. . .

I hope all those young Chinese men know how to swim because . . .

The only way China knows how to move people is in shipping containers!


Badum Tish!

BurningFuld's picture

They will just make a human bridge over to Japan.

Ghordius's picture

bloodthirsty? too many vampire movies? ;-)

we are having several hot wars going on - for example in Syria or Mali - and we just had several hot wars where the troops aren't yet all home

it reminds me a discussion I had long time ago where one very cute French (history major) was saying that Americans and British commentators tend to see history through the lens of their own great failures and successes - and expect a repeat of those

she went further with this: because America suffered a "Great Deflation" (her words) in 1929 it's scared of it's return before anything else, because it suffered from trade wars in the '30s it's scared of that return, and because both fumbled the fascist backlash in Europe both expect that again

her point was that Americans never had a situation like Argentina - and this is uncommon, in the experience of most other nations (she was forgetting the monetary collapses of the US Civil War, I guess, but they are a long way back)

anyway, even if you are expecting a repeat point for point, please remember that the trade wars of the '30 were over a decade long, and they are usually an escalation of currency wars, so the projected timescale would be

currency wars until 2025 - trade wars until 2035 - hot wars around 2040 (ah, the sheer lunacy of prognostication)

I already hear the unbelieving groan of the impatient young's among the readership of ZH who'd prefer to have a radical solution yesterday

oh, and MAD still applies, so we are talking about "Cold War" style wars anyway

fonzannoon's picture

the currency wars are ten years old now. Trade wars will kick in sooner than that. But since most countries are already in full blown depressions maybe we just skip step 2 this time?

Ghordius's picture

I could argue this in a different way: The Great Currency War started in August 15th, 1971, with Nixon's default on the gold backing of the global reserve currency

I could also argue that The Great Cold War had just an interlude of American Hyperpower - a moment where so many things could have been "fixed", but weren't

US military spending patterns would actually give some evidence of the validity of my second argument

fonzannoon's picture

we are not even arguing. Just trying to figure out the timeline.

Ghordius's picture

don't even try to figure out timelines - that's the hubris of people like Dr. Krugman

in physics and chemistry molecules behave roughly as expected - we humans have free will, and that throws a huge spanner in the works of predicion - particularly on timescales

Never One Roach's picture

Your discussion with her reminds me of When Money Dies. Here is the summary from Amazon web site:


"When Money Dies is the classic history of what happens when a nation’s currency depreciates beyond recovery. In 1923, with its currency effectively worthless (the exchange rate in December of that year was one dollar to 4,200,000,000,000 marks), the German republic was all but reduced to a barter economy. Expensive cigars, artworks, and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal; and a bottle of paraffin for a silk shirt. People watched helplessly as their life savings disappeared and their loved ones starved. Germany’s finances descended into chaos, with severe social unrest in its wake."


The book tells many stories of many different people and how they survived....or how they died. I remember the one of the little old lady who supported herself by selling her crucifix chain one tiny gold link at a time.



Sandmann's picture

Germans fear the Thirty Years War and try to secure their borders; Russians fear The Great Disorder and know how the Americans tried to dismember the country when Yeltsin was drunk; Chinese remember The City of London supplying opium from India; the British remember Norman gangsters destroying their North and ploughing salt into the land. This French history major should think about how schizoid France is about Napoleon its own Corsican Hitler and the invasion of German territory and Russia and Spain

sbfeibish's picture

They've got a massive problem if they enter a hot war.  How do they feed themselves?

Edward Fiatski's picture

Well, "Five dolla, sucky, sucky" just went up to 6 dolla.

booboo's picture

Me so howny but No happy ending for you round eye.

StychoKiller's picture

C'mon China, if you don't like the salty taste, chase it with a shot of Lao Chu!

(Bring on the "clouds and rain!")

redd_green's picture

I believe the phrase is "Fie dolla, sucky f**cky. Me love you long time...". 

Edward Fiatski's picture

Inflation, brosef. The "fucky" part comes at an extra.

WmMcK's picture

Fi dolla, make you holla.

... Or dig it out of the ground-- well, won't get fooled again!

youngman's picture

This will be a growth industry in the USA soon....much more sex for make ends meet and to pay off that student loan...

Yen Cross's picture

    This is going to start getting really good. Here is a good piece about Japan. Kuroda Seen Breaking Bank-Note Limit Buying JGBs - Bloomberg

    Japans debt problems make the U.S. look like childs play. China will come in and buy the shit out of the yen and scatter it around the world like confetti. Japan is playing with fire BigTime!

BigInJapan's picture


Japan fails to realize just how much money is behind China's hatred.

Perhaps if Japan hadn't exported half of all the Japanese private holdings of gold to China over the past handful of years, they could sing a different tune but the broke guy at the end of the bar, the guy who "used ta be a somebody" is now just the drunk guy at the end of the bar, with a house that's falling down, a wife that's getting boned by the next door neighbour, and the bankers ready to come in and end it all.

Lost My Shorts's picture

China hates everyone now (including all of SE Asia, India, Russia).  China has gone as far as it can by just bending the rules, and now their policy across the board is threats of attack (except South Korea, which they keep on a short leash via their NK client.)  Probably one thing the Japanese don't mind is that China is aggressively taking their place as most feared and hated regional bully.  Memory of WW2 will soon be gone everywhere except China.

As for the Japanese, what can they do?  They are totally broke, and now with a trade deficit, the yen would go splat no matter what central bank policy is.  They can only hope to plan the decline rather than experience a crash.

China ultimately can't stop the yen from declining.  They could of course eliminate Japanese export competition by physical damage, via bombs.  I am sure they think about that hourly and daily.  But becoming a global pariah hurts exports in other ways.

Sudden Debt's picture



Nice to see politicians use the threath of currency wars against other nations...


suck it up and a be a patriot... because that's what patriots do... lose it all because moronic politicians don't grasp the implications of their actions....


Sandmann's picture

Now that North Korea is threatening a pre-emptive nuclear strike on the US it is time to see how that region looks after the event !

Sudden Debt's picture

They are in desperate need of food. And they'll say they'll back down when they get their twinkies.


Yen Cross's picture

 O/T Who in the heck is buying Spanish and Italian bonds? Yields are down on both and they had decent auctions over night.


1:50   EUR     Spanish 2-Year Bonos Auction 2.632%   2.540%   01:50   EUR     Spanish 5-Year Bonos Auction 3.572%   4.123%   02:00   EUR     French 10-Year OAT Auction 2.10%   2.30%   02:00   EUR     French 15-Year OAT Auction 2.71%   2.85%   02:00   EUR     French 5-Year BTAN Auction 1.02%   1.12%


booboo's picture

Sacrificial banks laying on the alter of the Euro lords?

fonzannoon's picture

my guess is margin stanley. the next sacraficial pd got the order. or the ECB because they are about to print their asses off.

Yen Cross's picture

  The euro area banks can't even pay LTRO back. The ECB isn't supposed to directly partcipate in bond purchases. But heck, nothing is what it seems in this house of mirrors. Maybe it's all the swaps $ being pumped endlessly through the European banking system week after week.

fonzannoon's picture

"The ECB isn't supposed to directly partcipate in bond purchases"

The fed was never monetizing the debt. Until it was. It's all a bunch of bullshit Yen. The whole thing.

Ghordius's picture

Yen Cross, european national bank have a great history of support of the USD - call it tribute, if you want

this swap argument with the FED "supporting" etc. hides the fact that the FED has to take care of the stability of the huge amounts of dollars outside America - and the european banking systems are full of them

just remember that the FED has no FX reserves to talk home about - it has to operate through the dollar

fonzannoon's picture

Are we heading for an Alan Grayson redux? Don't call it a comeback>

Ghordius's picture

possibly ;-)

and yet to my point: Ben Bernanke can't buy back USDs with FX reserves, but he can play with the maturity of USD obligations - through FX swaps

Yen Cross's picture

 Thanks, that was a good point.

falak pema's picture

Concerning the Euro yield spread :

I am noticing a rising in core rates (Fr) as peripheral rates (It, Sp) fall. This is normal balancing or is it unusual?

Ghordius's picture

falak, the correct question might me more: is France "core" or "peripheral"? ;-)

savagegoose's picture

so usa does it for years its fine? but japan and its threats?  cmon china you're biggger than that.  aim your rage where it belongs.

tradewithdave's picture

Could it be that the vigilantes have found a friend in Bitcoin?

GetZeeGold's picture



If you make them out of gold and they weigh 1 troy ounce.....I'll take them. I will of course need to take possession.

ilovechina's picture

Actually Abe discussed many years ago hyper-inflating china to create asset bubble that bursts.

Bascially do to china what happend to japan.

China are smartening up to this. Everyone wants to become more competitive, the way to do it is print money as china has to import inflation cause they have no raw materials/food/energy. This is more important than domestic concerns. China waged financial war on japan some 20 years ago - its the reason Japan never came out of their slump. Manufacturing was undercut so much they had to move factories to china, had they stayed in japan - japan would have not deflated for so many years.

Japan only woke up to this when it found out that some in the political elite want to destroy Japan (literally im afraid to say). So they are preparing for war. if they are smart, they will hyper-inflate, more money/investment out of china and push the money into developing industry-military complex.


BigInJapan's picture

To which of the political elite are you referring?

Japanese, I hope.

I fully believe that Hatoyama and Ozawa are the architects of Japan's endgame and liquidation to China.

carefreemanjoe's picture

The same chinese will come back and say something like "we will never do any currency war" to soothe the market and the same market will rejoice and go up another 500 points. Amen.