Guest Post: Is China Ready To Pull The Plug?

Tyler Durden's picture

Submitted by Brandon Smith from Alt Market

Is China Ready To Pull The Plug?

There are two mainstream market assumptions that, in my mind, prevail over all others. The continuing function of the Dow, the sustained flow of capital into and out of the banking sector, and the full force spending of the federal government are ALL entirely dependent on the lifespan of these dual illusions; one, that the U.S. Dollar is a legitimate safe haven investment and will remain so indefinitely, and two, that China, like many other developing nations, will continue to prop up the strength of the dollar indefinitely because it is “in their best interest”. In the dimly lit bowels of Wall Street such ideas are so entrenched and pervasive, to question their validity is almost sacrilegious. Only after the recent S&P downgrade of America’s AAA credit rating did the impossible become thinkable to some MSM analysts, though a considerable portion of the day-trading herd continue to roll onward, while the time bomb strapped to the ass end of their financial house is ticking away.

The debate over the health and longevity of the dollar comes down to one very simple and undeniable root pillar of economics; supply and demand. The supply of dollars throughout the financial systems of numerous countries is undoubtedly overwhelming. In fact, the private Federal Reserve has been quite careful in maintaining a veil of secrecy over the full extent of dollar saturation in foreign markets in order to hide the sheer volume of greenback devaluation and inflation they have created. If for some reason the reserves of dollars held overseas by investors and creditors were to come flooding back into the U.S., we would see a hyperinflationary spiral more destructive than any in recorded history. As the supply of dollars around the globe increases exponentially, so too must foreign demand, otherwise, the debt machine short-circuits, and newly impoverished Americans will be using Ben Franklins for sod in their adobe huts. As I will show, demand for dollars is not increasing to match supply, but is indeed stalled, ready to crumble.

China, being the second largest holder of U.S. debt next to the Fed, and the number one holder of dollars within their forex reserves, has always been the key to gauging the progression of the global economic collapse now in progress. If you want to know what’s going to happen tomorrow, watch what China does today.

Back in 2005, China began a low profile program to issue government debt denominated in the Yuan, called Yuan bonds, or “Panda Bonds”. This move was almost entirely ignored by establishment economists. They should have realized then that China was moving to strengthen the Yuan, expand its use in other markets, and recondition their economic structure away from export dependency and towards consumerism (as they have done with the establishment of the ASEAN trading bloc). Of course, in the MSM at that time, there was no derivatives bubble, no credit crisis, no debt implosion. America was on cloud nine. China, through inside knowledge, or perhaps a crystal ball, knew exactly what was about to happen, and insulated itself accordingly by generating distance between its system and the soon to derail retail based society of the U.S. This dynamic has not changed since the 2008 bubble burst, and Chinese activity is still the ultimate litmus test for economic volatility.

Today, there is widespread confusion in markets over the direction of America’s financial future. In the wake of the credit downgrade, most investors unaware of the bigger picture are desperately clinging to any and every piece of news no matter how trivial, every rumor from the Fed, and every announcement from the government no matter how empty. China’s economic news feeds have been tightly regulated and filtered, even more so than usual (which is cause for concern, in my opinion), while distractions in Europe abound. Let’s take a step by step journey through these issues, and see if we can’t produce some clarity…

U.S. versus EU: A Game Of Hot Potato…To The Death?

The theatrical seesaw between the U.S. and Europe is not only becoming obvious to the most narrow of economic analysts, it is also becoming kind of boring. The entire ordeal has been subversively exploited as a false example of systemic “contagion”, and with purpose; global banks need to convince average Americans and average Europeans that destabilization in one portion of the world will automatically lead to destabilization everywhere. This concept is true only so far as forced globalization and centralization have made it true. That said, the charade has been somewhat effective in conditioning the populace with ideas of collectivist survival. In other words, we are being trained to take fiscal responsibility for countries outside of our sovereign national boundaries as if we are morally tied to every penny they have or do not have (global socialism/feudalism - here we come!). This process is culminating in worldwide harmonization through fear as well as guilt.

What we are witnessing is NOT contagion. Instead, we are seeing multiple and mostly separate collapses activated simultaneously. Each nation suffering dire straights in Europe is doing so because of its own particular financial problems, not the problems of other countries nearby, and certainly not those of countries on the other side of the world. Contagion arguments are only applicable to those economies overly dependent on exports, yet, China has already shown (at least in the case of the U.S.) that such dangers can be controlled by minimizing exposure to the poisoned portions of the system and reverting to more internalized wealth creation.

Treasury Secretary Timothy Geithner and the heads of World Bank and IMF have perpetuated the lie of contagion between the U.S. and the EU primarily to service the progress of globalization, but also to hide the inflationary effects of dollar devaluation. While the greatest threats are stacked squarely against America’s economy and the dollar, somehow we have been led to focus on the comparatively less explosive drama in the EU. U.S. dollars, as well as Chinese funds, are flooding into Europe to support the region, while investment in the U.S. and its debt weakens and disappears. In the meantime, a weaker Euro makes the dollar look more attractive (at least on paper), but in reality, both currencies are on the path to bloody hari-kari.

How much longer can this game of hot potato go on? Again, China decides. Eventually, China is going to have to choose which currency to support; the dollar or the euro. Supporting both is simply not an option, especially when the chance of collapse in both currencies is so high. So far, the most logical path has been the euro. While the EU may suffer an astonishing breakdown, we must take into account that our own Treasury and central bank have seen fit to throw trillions of dollars into propping up Europe (with even more on the way):

With so much inflation and devaluation being thrust upon the dollar in the name of saving the EU, China’s move towards a stronger economic relationship with Europe at the expense of the U.S. is a no-brainer:

If I were to place a bet on who would come out of the crisis less damaged, my money would be on the EU, everyone else’s money certainly seems to be…

China Discreetly Moving To Dump U.S. Debt

China has been tip-toeing towards this for years, and has openly admitted on numerous occasions that they plan to institute a break from U.S. debt and the dollar in due course. Anyone who continues to argue that a Chinese decoupling from America’s economy is impossible at this point is truly beyond hope. Though increasingly more rare, news on China’s push to drop the U.S. still leaks out. Recently, a top advisor to China’s central bank let slip that a plan is in place to begin “liquidating” (yes, they said liquidate) their U.S. Treasury bonds as soon as possible, and reposition national investments into more physical assets:

But let’s step back for a moment and pretend China hasn’t told us exactly what it is going to do time and time again. Instead, let’s look at the fundamentals.

The primary concern in China right now is inflation. Because China does not yet have the ability to export its fiat to other markets the way the U.S. does, its own liquidity injections in the face of the credit crisis have led to severe price increases. In August alone, overall inflation was rated at 6.2% (always double government produced numbers to get true inflation). Food prices jumped 13.4%, while meat and poultry jumped 29.3%. Because these numbers are around 1% lower than in previous months, the Chinese government has prematurely proclaimed a “cooling period”:

With harsh inflation continuing unabated, eventually, the Asian nation will be forced to enact abrupt policies. This will likely take the form of a strong Yuan valuation, or a “floating” of the Yuan. A sizable increase in the value of the Chinese currency is the ONLY way that the government will be able to combat rising prices. By increasing the buying power of its citizens, the government allows them to keep pace with rising prices, and eases the tension within the populace which could otherwise lead to civil unrest. For China to ensure that a floating of the Yuan will lead to a much higher value, their forex and treasury holdings will have to fall. Period.

A dumping of the dollar will give the Chinese room to breath, and this space will be needed very soon. The debt ceiling deal made by Congress in the aftermath of the credit downgrade left the rest of the world unimpressed. While the MSM tries to make us forget that this event ever occurred, most foreign investors have not. Markets are anxiously awaiting an announcement from the Fed for further liquidity injections. If this announcement is not made after meetings next week, then it will certainly be made before the end of the year. Ironically, the same quantitative easing that investors are clamoring for today is liable to become the final signal for China to cut its losses and separate from U.S. securities completely. China has been positioned for many months now to take such measures…

Lights Out…

Delusions of Chinese dependency on the U.S consumer still abound, and those who suggest a catastrophic dump of U.S. debt and dollars in the near term are liable to hear the same ignorant talking points we have heard all along:

“The Chinese are better off with us than without us…”

"China needs export dollars from the U.S. to survive…”

“China isn’t equipped to produce goods without U.S. technological savvy…”

"America could simply revert back to industry and production and teach the Chinese a lesson…”

“The U.S. could default on its debts to China and simply walk away…”

“The whole situation is China’s fault because of their artificial devaluation of the Yuan over the decades…”

And on and on it goes. Though I have deconstructed these arguments more instances than I can count in the past, I feel it my duty to at least quickly address them one more time:

U.S. consumption of all goods, not just Chinese goods, has fallen off a cliff since 2008 and is unlikely to recover anytime soon. China has done quite well despite this fall in exports considering the circumstances. With the institution of ASEAN, they barely need us at all.

China is well equipped to produce technological goods without U.S. help, and if Japan is inducted into ASEAN (as I believe they soon will be), they will be even more capable.

America will NOT be able to revert back to an industrial based economy before a dollar collapse escalates to fruition. It took decades to dismantle U.S. industry and ship it overseas. Reeducating a 70% service based society to function in an industrial system, not to mention resurrecting the factory infrastructure necessary to support the nation, would likely take decades to accomplish.

If the U.S. deliberately defaults on debt to China, the global reputation of the dollar would implode, and its world reserve status would be irrevocably lost. We won’t be teaching anyone a “lesson” then.

Yes, China currently manipulates its currency down, but then again, so does the U.S. though quantitative easing. Both sides are dirty. Taking sides in this farce is pure stupidity...

Now that all that has been cleared up (again), the primary point becomes rather direct; the reason it is difficult to predict an exact time frame for an American collapse is because all the pieces are in place to trigger an event right now! There are, of course, stress points within the system that set a time limit, even on global banks and China, but a full spectrum catastrophe is not only a concern for some distant future. Every element needed for the so called “perfect storm” is ever present and ready to ignite at a moments notice. The destructive potential coming from China alone is undeniable. Everyday that the spark is subdued should be treated as a gift, an extra 24 hours of education and preparation. This is how close we are to the edge. It is not for us to be alarmed, but to be ready, and ever aware.

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Todd Horlbeck's picture

China will drop the dollar at the worst possible moment for the US interests.  I think this is far off and untradable.

CrazyCooter's picture

I have been going through the Jim Rickards interviews over at King World News in chrono order (oldest first starting in late '09). I am a bit over half way through and its becoming clear to me that China is fscked. Fiat is pretty much toast (big surprise - never worked in whole history of paper money) and the only other proven money is gold. SDRs are in the running, but that may see the same difficulty that the Euro sees.

Because Europe and the US have all the gold and the rest of the world doesn't, in a post fiat default world, assuming some sort of gold standard, its going to be tough sledding for those without China being the most extreme example.



LawsofPhysics's picture

Good analysis.  Apparently, China was not at the crucial Jeckle Island meeting so many years ago.  In this case, the only way to the top for China would seem to be a global war where they simply take the gold and as many assets as they can.  Is China the new Germany?  It does seem that they are concerned about U.S. tresuries lately, but I think they are still buying.

MachoMan's picture

I've tried to make this point for some time...  but I get the inevitable, "but those holdings are overstated and are really just tungsten or leased, etc."

A good political maneuver always includes a viable back-up plan.  In this case, given the fall of fiat, that means real currency.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

So you believe published estimates of the gold held by the U. S. and UK??!!!

LowProfile's picture

UK, I have no idea.

US...  The military holds the people's gold.

You decide.

Pure Evil's picture

I could accept this guy's argument a lot better if he would have bothered to explain just who in the hell is going to buy the US debt obligations they plan on dumping sometime in the near future.

I've got some worthless stocks sitting in my brokerage account, now if I could just find some new sucker to take them off my hands.

I've also got a house full of worthless crap, anyone interested in making an investment.

It would make more sense to say that the Chinese have no intention of buying more debt obligations from the US as soon as the debt they hold matures.

But, I can't see anyone else out there stupid enough to buy their existing US debt obligations, or I would think they would already be dumping them with as much gusto as they could muster.

LawsofPhysics's picture

I agree.  Many of us have been waiting for this for a long time.  China is great at reverse engineering and making things better and cheaper to sell back to us.  Quite often they forget details and a building falls over, or some milk kills a few children.  Unfortunately they have reversed engineered our own ponzi and have sold it to their people.  If China was really a great land of opportunity, we would see more people waiting in line to move there or become citizens.  China seems more like hotel california.   Certainly once you become chinese it is all about moving China's interests forward and not your own.  

GoinFawr's picture

"China is great at reverse engineering and making things better and cheaper to sell back to us"

Isn't that what the west used to say about Japanese technology? Too bad the vacuum tube lobby was so powerful...

FEDbuster's picture

As fellow Communists (and Crony Capitalists), they will wait to see if Obama is re-elected. 

I think the conversion is going on now, but at a slow enough pace we don't see it happening.  Like turning the heat up slowly on the frog in the pot of water, he never knows he is boiling to death. 

I also think there is a great deal of gold flowing into China's reserves, more than we know about.  Plus, I think they are still filling their strategic oil reserve which is five times the capacity of ours.

SwingForce's picture

It's impossible to drop the dollar- there's too many of them, and not enough OTHER currencies to go into. Note the ECB SWP lines, they NEED USD's. If China wanted to get out of the dollar so badly, it would have arranged their own swap lines, no?

LawsofPhysics's picture

Yes, but then they would have no control regarding who swaps and their currency starts to float via the swap line.  Can't have that now can we.

CH1's picture

I dunno... I've been waiting a long time for the Chinese to be sane. It never seems to happen. Maybe it's related to the Marxist insanity.

GeneMarchbanks's picture

It's related to a different conception of time. Read their books, study their culture and you'll see that nobody is in any rush.

Look at the absolute barage of garbage being fired off furiously in Western media. Complete cultural ADHD.

China is going to strike when things are most quiet. They probably love this little lull and period of complacancy. Don't sleep on them.

narnia's picture

the belief that Chinese currency manipulation brutalizing the quality of life of its people is the undoing of American jobs, rather than the neo Marxist sprint away from free markets via the warfare & welfare state in the US, is even more insane.

GoinFawr's picture

Wait... did you hear that? That was the sound of Marx rolling over in his grave, and me rolling my eyes.

maxmad's picture

Itsover, bitchez!

Ratscam's picture

Mr. brilliant Megahedgefundtrader MHFT will fix the problem. He is in China at this moment. lol

Tompooz's picture

:.) He will instruct them how to front-run themselves with derivatives.

Northeaster's picture

When this changes significantly, then I'll believe it, actions speak louder than words:

sdmjake's picture

Thanks for the first glance it strikes me that CHina has basically held the line for the last year, Russia has reduced their participation by about 40%, and the good ol UK has almost doubled their exposure.

May we live in interesting times....

ronin12's picture

How do I get a larger shot of your avatar?

cossack55's picture

Maybe "yellow peril" should be changed to "green peril".

Sofa King's picture

Wow.  This article is a whole lot of nothing.  US does not need China and China does not need the US.  At this point in time the relationship is beneficial.  When it no loger is, we will go our seperate ways...and nobody has the talent or insight to predict the outcome of such a complex unwinding.  One thing I do know is that America has resources available that can be developed in order for it to be self-sufficient and China does not, take from that what you will.

Sofa King's picture

Only three down votes.  Come on guys, you can do better that that.  There have to be more people out there with the distroted view that America is a barren wasteland when compared to the Eden like China.

mayhem_korner's picture

You must've failed "subtlety" in troll class.  Only the really well-disguised anti-logic posts get high red numbers.  I'm thinking you'll have a stronger showing on your second post.

Apocalicious's picture

The overleveraged developed West is declining. China is not. Our banking system is much more rotten than theirs. Our fiat is in terminal decline from its status as global reserve currency, a status the yuan will likely eventually take. Will it be linear, without bumps along the way? No. Will it be next decade or 50 years from now? I don't know, but do you disagree with the eventual outcome? China does not have resources? Do you mean other than 1.3 billion people who work 12 hour days, 7 days a week for less in a year than most people here in "poverty" make in a month, all driven to try to find a better life? And the relentless, ruthless approach to building relationships in the Middle East, Africa, Australia, etc. to secure access to natural resources with complete disregard to humanitarian or environmental concerns so long as they can get the resource materials they need to build their economy? Yes, yes you are right. Let's short that story over the long run...


Scisco's picture

How do you know that the Chinese banking system is not more rotten than the American one. Their banks report what the government wants them to report. Maybe we just here about American corruption because the probability of a reporter disappearing is less when a negative story breaks.

Lord Koos's picture

I can guarantee that China has far more corruption in the banking system (and everywhere else) than does the US.  That said, the USA is doing their best to keep up.

Shock and Aweful's picture

Our banking system is rotten to the core alright...but I would not go as far to say that China's is better...or even less rotten.

Really....How would be know? 

China has the central-planning system down pat (they should after nearly 70 years of Communist rule).  

Information about China's finances or banking systems only makes its way to the west after being run through an extensive set of government filters and censors....They are playing our game (the game of managed perceptions)...and they are good at it.

I can say without a doubt that there is no way for anyone to truly know the state of the Chinese one...

Scisco's picture

Ohh the central planners know. That is why they keep there wealth abroad. There was an article about that here a while back, no idea what to search for to dig it up.

laomei's picture

No, them keeping their wealth abroad has more to do with being corrupt and having an exit strategy if caught.  Still, it's less corruption than goes on in the us.  A lot of it also has to do with tax evasion, however China really doesn't give much of a shit about personal income tax and chooses to focus more on the business-side of it... which is far easier to monitor and control.


Those loans, yea, it's not unlimited money for state-owned corps to do whatever with.  State owned corps have their CEOs and upper level staff appointed by the government amongst their own ranks.  If they fail, they're done... in more ways than one... not so much execution unless it was really horrible shit, but they are fired, kicked out of the party and jailed.  Few years back, CNNC's director was caught doing a thing where he sucked out a giant pile of money from an obsolete account and played it on the stock market.  He lost basically all of it.  I knew the guy personally before that happened.  His plan was to use earnings to boost the company bottom line and be recognized for his smartness.... He had a few enemies though and the story became that he was just trying to pocket the earnings and return the original amount without anyone noticing.  Second story won out and he's doing 10-15 now and a lot of the deals he brokered which would have left him some respect were automatically shifted over to a competing SOE.


Also... command economy? Hah!  Shit's more capitalist here than anywhere in the west.  Food, energy and transportation costs are largely subsidized for the greater good and it fucking pays off.  Certain critical supplies are price-controlled... but why is this in anyway a bad thing?  Those prices are kept artificially low, not the other way around.


And check this shit out.  We get pension, healthcare, disability, unemployment, maternity insurance here as a mandatory thing, plust this sweet thing called a housing fund all pre-tax.  Excluding the housing fund, the burden falls 37%/11% on the employer/employee (pre-tax).  But the housing fund is a matching fund for duh... housing.  So, I opt in with the max 12% contribution, and the employer has to match it.  The cap range is 60%~300% of average local wages.  So the cool thing here is that if you already have a damned house, or you just want the cash, you can suck that money right back out every 3 months.  Do the math here... 11% - 12% = -1%.  So, in the end, the employer is in effect paying everything and employers screwing around in any way with this system is met with stupidly extreme consequences.  Pretty nice eh?

eaglefalcon's picture

Of course there is a way to know.  I remember wikileak told a story about China's next leader (or sort of "heir apparent") never bothered to look at official statistics but he claimed he knew the status of the economy by how much electricity is consumed and how many freight trains are scheduled.


You can tell their economy is booming because they are actually buying more oil, more gold, more steel and more everything and taking a greater share of all global resources.  Or the fact that GM sold much more cars in China than in US last year, despite the fact that the Chinese need to pay 100% cash for a car and 60% down for a house (Americans however, have wide access to "financing", an euphemism for "debt")


You are right that few people know about the balance sheets of Chinese banks, they might be in the same sorry shape as American or EU banks.  Then again, at the end of the day, banks are not the real economy.  One day, when all the banks are wiped out, when all the "services" like lawyers, insurance, accountants, financial planners, "health care" are wiped out, the only remaining weahlth is gold, silver, commodity and manufacturing capacity.  In that sense, they are not doing bad.  Now what is left for the US?  8000 tons of gold, weapon industry, a good agricultural sector, good natural resources including good oil reserve.  Most of the "light industry" is gone.  After TSHTF, and after gold is remonitized,  every ounce of the 8000 ton gold needs to be spent to buy back some of the original manufacturing capacity, and that's most likely not enough.  Building a manufacturing base is most time consuming and capital intensive and it'll take decades before things go back to normal.  That's assuming that the gold is still in fort knox.  If the gold is not there anymore, I guess things will get real ugly

Version 7's picture

US does not need China and China does not need the US

go to walmart and try to buy something not made in China

Dr. Richard Head's picture

Financial fraud in the FIRE industry and bombs made for the MIC compose a much larger portion of US GDP than retail consumption, as long as you count the shadow banking industry and off-budget war funding.  As long as the US can export inflation by blowing up villages in third world countries and kill all of those muslims, as well as helping to blow up the developed world through financial suicide debt bomging, the US population should be able to enjoy a slower reduction in the standard of living for a longer period of time. How much time is the only question I have.

See Krugman was right in the broken window analogy.  We should thank the lord above that we can export our creative destruction elsewhere, otherwise that creative destruction would be here.  /sarc

They hate us for our freedom and way of conspicuous consumption lifestyles don't cha know.

Esso's picture

That's easy, toilet paper, disposable diapers, most chemical products, etc.

Or did you mean products you use more than once before you throw them away?

If that's the case, good effin' luck.

Esso's picture

Amazing video of what America USED to be able to do before OSHA, carpy tunnel syndrome, political correctness, and our average weight was below 350 pounds.

It's NOT hip to be a homo.

Lord Koos's picture

The United Auto Workers Union was formed a couple of years before that film was made.

HedgeFun's picture

This article parallels John Williams news letters and (not to be cliche) is a black swan event, but nevertheless a possibility.  We can only speculate what China's game plan is, but if there is a dump of the dollar it will be a momenteous task to mop up excess dollars in the system.

Reptil's picture

Gold accumulated, trade routes secured (see Tarpley on Pakistan), relative condition of western financial system.

cue socialist marching music:

snowball777's picture

Aren't both those "illusions" one and the same? And subordinate to the central illusion that certain resources can continue to be used unsustainably?

Can China grow into a 25% export hole if they "abandon" the US? Can they do so if the rest of the world is imploding too?

I guess we'll now within the next two years.

DeadFred's picture

It's not about continuing to grow, it's about coming out first and strongest from the ruins. Most here on ZH think the ruins are coming so why so much resistance from so many in believing the Chinese see it coming as well. Just like so many ZHers they are stockpiling gold silver and ammo expecting to ride out the storm and emerge in better shape than their neighbors. What's so hard about believing they might 'push' things a bit to precipitate the storm when it's to their advantage?

snowball777's picture

Gold is not the "stockpile" they should be most concerned with. And they'll need a lot more "beans" with 1 billion mouths to feed.

laomei's picture

china *does* stockpile food in strategic reserves, this started being implemented after 2009.  warehouses are kept at maximum capacity and are located strategically based on population densities.  supplies are rotated as required and current sotckpiles represent a half-years supply for the entire country.  China is also capable of feeding itself, which has always been a major policy point.  India however... india's fucked.

Life of Illusion's picture



When China replaces dollar reserves (paper) with “Real Assets” only then will it not be in their best interest to support the dollar. Replacing their dollar reserves is a political theater and takes time, it’s a process.

Get educated, be prepared, stand ready,,,my ass. Get in front of these dollar dumpers and get “REAL RESOURCES”.


Flakmeister's picture

Just a couple of observations:

The interest the Chinese receive on their US treasury holdings buys about 30% of their oil imports. The key factor in the dollar will always be the pricing of oil in dollars.

The decoupling of Brent-WTI price has been discussed extensively, perhaps, it is partly due to the decoupling of oil priced in "foreign dollars" and "domestic dollars". I don't claim this to the be the case but it could be a factor.