Monday was another big day in China’s grand plan for world domination. After years of suppressing the value of their currency against the dollar, the Chinese authorities announced that they would let the renminbi (RMB) float more freely. And suddenly a decade-long conflict between these two superpowers seems to have been resolved.
But this was no activity of charity; China has a grand plan. And either you get on board and try to profit from it, or you stand to lose wealth and purchasing power over the coming years.
Today I want to outline three ways China’s scheming could be about to affect you and your finances.
The real motive behind this move
Christine Lagarde, head of the IMF, was delighted with this week's news: "I would like to welcome this important step by the People's Bank of China to increase the flexibility of their currency."
She and her ilk see the move to allow the RMB to appreciate as fantastically positive. The argument goes that it’ll make Chinese products dearer and allow us to recapture some of our manufacturing base.
And it’s true, a stronger RMB should drive up prices of everything from iPods to pushbikes that we import from China. That could be good for us if it gives us a chance to start manufacturing this sort of stuff again.
But I’ve got to say I’m not convinced. As Chinese goods become more expensive, I think this move will contribute to higher inflation in the West. Not much for us to celebrate there.
But more importantly, it’ll give the Chinese greater purchasing power. Yes, as a seller it makes its proposition weaker, but as a buyer, it's suddenly wielding an awful lot more power - and that’s the real motive behind this move. Let’s break down the strategy at work here.
China’s domination strategy: Step 1
China has become important and integral to the global economy. Wherever I go, it’s the same: container ports are rammed full of products streaming out of China. And as the containers head west, cash heads east.
Alright, so most of that dollar-based cash has remained in the West. The Chinese have bought up mountains of Western debt and have effectively become bankers to the USA.
But the Chinese know that they can only push this strategy so far. The West can’t afford to pay back the debt it’s already amassed. Frankly, just paying the interest on both government and personal borrowing is becoming all but impossible. Ultimately this is what the European crisis is all about. In the US, they’ve hit the ‘debt ceiling’ – and after the presidential election, it’s going to come back to haunt the markets once again.
China can undoubtedly smell trouble. It’s time for the next stage.
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China’s domination strategy: Step 2
Though a stronger RMB will dampen some demand for China’s exports, this is by no means likely to kill off its exports. What it does mean is that for every good sold, China will now save up even more dollars. And so China will continue to build its purchasing power.
Don’t forget, China has already built a considerable war chest. Now it's seeking to make it even stronger. And that’s important because it's now looking to deploy these savings. What China really needs is energy and resources. If you follow the mining industry, you’ll have noticed that the Chinese are building strategic positions all over the place. They have been crawling all over Africa and Latin America in recent years.
And that leads us to the final part of this grand plan.
China’s domination strategy: Step 3
China plans its strategy in five-year blocks. And China has already stated that over the next five years it plans to direct much more of its industrial might towards the domestic economy. Effectively what they’re saying (with an appreciating currency) is: if you Westerners want our products, then you’re going to have to pay up for them.
Fair enough. And in many ways this could be a good thing. Some of our manufacturers will be very happy to see a more level playing field. And top quality engineering outfits may even find they’re able to build exports to China.
But overall, this is going to cause a great deal of damage to the average Westerner. Not only will we find products getting dearer through imported inflation, but the global dash for resources will push up prices of locally made goods too.
Yesterday the ONS released inflation data. To judge by the press, it was a “shocking” rise in inflation driven by food and clothing.
But maybe we shouldn’t be so surprised, and maybe we will soon get very used to this threat to our wealth.
What you can do to protect yourself
I suspect that ten or twenty years from now we’ll look back and be shocked by how cheap things were back in the good old days before China started to assert itself.
I also think that you’ll be very pleased with yourself if you’ve taken the trouble to protect your interests with some shrewd investments today - especially now that they’re still cheap.
Here at The Right Side, we love commodities, we like a few emerging market investments and we can even find favour with some of the West’s top-notch manufacturers.
And by using precious metals as our favoured store of money, we can stay one step ahead of the secret currency wars playing out right under our noses.
This game is playing out very slowly and it’s going to go on for quite some time. But for anyone that cares to look, China’s strategy is pretty transparent, and the consequences pretty easy to fathom.
You can, like Christine Lagarde, assume that China’s allowance to let its currency to float to the top is a benign move allowing our industry to get back on its feet. But, I’d take a more cynical approach – I’d assume it’s all part of the grand plan for world economic domination. I’d get some protection in place if I were you.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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