China
Mocks G7 As "Gathering Of Debtors", Warns "Confrontation
Will Be A Disaster For Europe"
15
June, 2015
Vladimir
Putin didn’t get an invite to the Angela Merkel-hosted G7 Summit in
Bavaria last week, which means the Russian President not only missed
out on two days at the scenic Castle Elmau, but also on lederhosen
shopping with US President Barack Obama who, judging from eyewitness
accounts and a variety of amusing photo ops, channeled his
inner Clark Griswold upon touching down in the Bavarian town of
Krun. The G7 isn’t pleased with Russia’s ‘behavior’ in
Eastern Europe and so, Moscow has been expelled from the cool kids
club until such a time as the Kremlin agrees to uphold Western
democratic values.
(Obama
in Krun)
But
the G7 is an equal opportunity exclusionist which means it’s not
just former superpowers that aren’t welcome, but rising superpowers
as well, which means you won’t be seeing Xi Jinping at the table
either.
But
“Big Uncle Xi” (as he is affectionately known in China) likely
isn’t losing any sleep because in the eyes of Beijing, the G7 —
much like the IMF and the ADB — is a relic of a global economic and
political order that is well on its way to obsolescence if it isn’t
there already.
(Xi
Jinping; illustration: The New Yorker)
The
Global Times (which, it should be noted, is owned by the ruling
Communist Party’s official newspaper, the People’s Daily) has
more on why the G7 is largely irrelevant in the modern world.
The G7 summit concluded in Germany last week. Chinese scholars and media barely showed any interest to this outdated informal institution, except for a Declaration on Maritime Security issued by G7 foreign ministers. The declaration expressed their concerns on "unilateral actions" in the South China Sea, with China as the obvious target.
Judging from the agenda and outcomes of this year's G7 summit, it has run counter to the global trend of peace, development and cooperation and become mere of a geopolitical tool.
Since the very beginning of the establishment of the G7, it has been a rich-man's club that consists of Western major powers and aims to maintain the collective hegemony of the US-led West. It used to focus on the world's economic issues, and then extended to political and security affairs. After the Cold War, Russia was included in this grouping, which almost became the core of global governance and looked as though it might replace the UN Security Council.
However, the other G7 members never treated Russia as an equal partner. Russia was only entitled to discuss politics and security but not financial and economic issues.
As the world entered the 21st century, new economies started to emerge and the world's political and economic center has gradually shifted to the Asia-Pacific. The 2008 global financial crisis forced G7 members into a stalemate, and these nations started to realize that they could only get rid of the crisis with the help of emerging economies. Therefore, the US proposed defining the G20 as the main platform to discuss international economic problems. Within the G20, although the G7, as a sub group, intends to dominate the agenda-setting, the G7 cannot play its role without cooperation from new economies whose voices can be heard more nowadays.
Yet countries such as the US and Japan can hardly accept the rising international status of emerging economies and are reluctant to give up their hegemony. When the financial crisis eased slightly, Western media vigorously propagated the "revival" of the G7. But the economic performance of G7 members meant the summit was a gathering of debtors.
To some extent, the role of the G7 in global economic governance is negative. The IMF and the World Bank are under the control of G7 members. This is one of the reasons for the low implementation capacity of the G20.
In the field of politics and security, Western powers relentlessly promoted the role of the G7. But the G7 has proved to be unable to maintain regional stability, and has led to chaos in the Middle East instead. After the Ukrainian crisis, the West excluded Russia from the original G8, making the current G7 grouping on the way to becoming a Cold War relic.
Russia and China are main targets of the discussion at this G7 summit. They decided to continue to impose pressure on Russia amid the ongoing Ukrainian crisis. As for China, they focused on issues around the Asian Infrastructure Investment Bank and the East and South China Sea. But it is worth noting that European members have shown a different stance from the US and Japan on both matters.
Whether the G7 will become a geopolitical tool or a Cold War relic largely depends on European countries. Unlike the US, Europe shares a closer geopolitical and economic links with Russia. If the G7 becomes a platform for the confrontation between the West and Russia, it will undoubtedly be a disaster for Europe. Seeking a peaceful solution to the Ukrainian crisis with Russia fits European interests. As for the East and South China Sea disputes thousands of kilometers away from the European continent, these countries needn't necessarily get involved.
During the G7 summit, Japanese Prime Minister Shinzo Abe tried to pull European countries to Japan's anti-China bandwagon. China should continue to stay wary of the Japanese government.
Obviously
this is to be taken with a grain of salt considering it comes
directly from the politburo, but nevertheless, there are some
important observations here that deserve attention.
For
instance, China equates the G7 with the IMF and the World Bank, two
institutions which Beijing is well on its way to challenging via the
AIIB and The Silk Road Fund. In public, China has been careful to
adopt a conciliatory stance towards existing multilateral lenders.
This partly reflects the fact that China isn’t eager to ruffle any
feathers among the Western countries who took a rather palpable
political risk by throwing their support behind the AIIB in the face
of fierce opposition from Washington. Beyond that though, adopting an
overly critical stance towards institutions whose goals are
ostensibly similar to those of the AIIB risks sending the wrong
message to countries who depend on supranational institutions for
aid. That said, equating the IMF, The World Bank, and the ADB with
the G7 before subsequently calling the latter a “Cold War relic”
is a kind of backdoor way of suggesting that the G7-dominated
multilateral institutions are, by virtue of their leadership,
hurtling towards irrelevancy.
Further,
the assertion that “the economic performance of G7 members [means]
the summit [is] a gathering of debtors” is on the one hand
hypocritical (China, after all, is sitting on $28 trillion in debt)
but on the other hand speaks to the fact that, even as China’s
economic growth slows as Beijing marks a difficult transition from an
investment-led economy to a consumption driven model, economic growth
in the West has simply stalled out altogether and as for Japan, well,
Tokyo has been grappling with a deflationary nightmare for decades,
something Abenomics has so far failed to correct. In other words,
China’s economic miracle may be “landing hard” so to speak, but
there’s certainly an argument to be made that even in its crippled
state, the Chinese economic machine is still capable of outperforming
the West.
Finally,
and perhaps most importantly, China suggests Washington’s dominance
has led the G7 to pursue myopic foreign policies that have conspired
to stoke sectarian chaos in the Middle East (it’s now almost
impossible for the US to keep track of where it supports Shiite
militias and where it backs Sunni militants) and create the
conditions for a second Cold War in Eastern Europe. The deliberate
exclusion of Russia, Beijing says, risks transforming the G7 into
what is effectively the political arm of NATO, which undercuts the
institution's ability the foster peace and cooperation.
Again,
some of this is propaganda served hot and fresh straight from the
Communist Party kitchen. That said, the underlying geopolitical
analysis is spot-on even if it's presented with a hyperbolic veneer.
The
G7, like the IMF and the World Bank, is quickly falling victim to the
arrogance of its most powerful members. If an overriding sense of
Western exceptionalism is allowed to create the same type of
complacency and rigidity that has paralyzed the IMF, it may not be
long before the world's emerging powers supplant entrenched political
bodies much as they have moved to supersede ineffectual economic
institutions.
China Dumps Record $120 Billion In US Treasurys In Two Month Via Belgium
15
June, 2015
Those
who have been following the saga of "Belgium's" US Treasury
holdings learned last
month that the "mysterious buyer" behind
Belgium's Euroclear was, as some speculated, China all along. Nowhere
was this more evident than when showing an overlay of China and
Belgium's combined TSY holdings versus China's forex reserves.
This
is what we concluded last month:
- "Belgium" is, or rather, was a front for China: either SAFE, CIC, or the PBOC itself.
- That Belgium's holdings, after soaring as high as $381 billion a year ago, have since tumbled back to only $2532 billon as China has dumped the bulk of its Euroclear custody holdings, and that once this number is back to its historical level of around $170-$180 billion, "Belgium" will again be just Belgium.
- China's foreign reserves tumbled and this was offset by a the biggest quarterly drop in Chinese pro-forma treasury holdings, which dropped by a record $72 billion in the month of March, and a record $113 billion for the quarter.
It
wasn't precisely clear just why China, which had historically used
UK-based offshore banks to transact in US paper in addition to the
mainland, would pick Belgium or why it chose to hide its transactions
in such a crude way, however the recent accelerated capital outflow
from China manifesting in a plunge in Chinese forex reserves, coupled
with a record monthly liquidation in total Chinese
holdings, exposed just where China was trading.
And
while we have yet to get an update from Beijing of its April forex
reserves, we know that China's Treasury liquidation has continued.
Enter: Belgium, only this time it is not a "mystery" buyer
behind the small central European country, but a seller.
As
the chart below shows, after a record $92.5 billion drop in March,
"Belgium" sold another $24 billion in April, bringing
the total liquidation to a whopping $116.4 billion for the months of
March and April.
This
means that after adding mainland China's token increase of $2 billion
in April after a $37 billion increase the month before, net
of Belgium's liquidation China has sold a record $77 billion in
Treasurys in the most recent two months.
And
while we eagerly await the monthly update of Chinese official forex
reserves, we can estimate that the drop will be another $50-60
billion in the month of April.
The
good news, for those tracking the story of China's unprecedented
capital outflows, is that after "Belgium's" record March
dump, in April Chinese Treasury sales slowed to the slowest pace in
the past three months.
In
other words, China may finally be getting its capital outflow problem
under control, which, incidentally is bad news for the Chinese stock
market because if true, it means the PBOC can now step back from
micro-managing the stock market bubble and its "beneficial"
current account inflows to offset the declining capital account.
But
what is perhaps most curious is that even with China liquidating such
a massive amount of US paper into a very illiquid market, the yield
on the 10Y did not blow out far more in the months of March or April.
And the last question: who did China sell all this paper to?
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