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Tuesday, November 25, 2014

THE TAIL OF THE DRAGON by JC Collins

China Liquidity



THE TAIL OF THE DRAGON




How and Why China Delayed IMF Reforms Through Republican Party Donations
By JC Collins
In March of 2009 the People’s Bank of China Governor Zhou Xiaochuan called for a reform of the international monetary system.  Among the initiatives called for by Zhou was the creation of an international reserve currency which would be disconnected from any individual nations currency, and would remain stable by removing the deficiencies inherit in using credit based national currencies.
Other factors called for by Governor Zhou was for part of the official reserves of member countries to come under the centralized management of the International Monetary Fund.  Special Drawing Rights, or SDR’s, of the IMF should be expanded as a means of payment, denomination of securities, commodity denomination, such as oil, and the denomination of the new international reserve currency mentioned above.
Along those lines the PBoC also called for a larger representation within the SDR basket composition for all major economies based on GDP.  This would presumably be a reference to adding the Chinese currency, the renminbi, to the SDR basket.
Every five years the composition of the SDR basket is open for adjustments. During these reviews the initial weights of the inclusive currencies are established but over each period the currencies fluctuate with the daily movements of exchange rates. Appreciating currencies gain a larger share of the basket and depreciating currencies a smaller share.

The last such review was completed in 2010 and at that time the RMB was nowhere near internationalized enough to warrant inclusion in the basket.  The next review will be completed by July, 2015, and will likely see the RMB added to the basket as the rate of internationalization has increased dramatically over the last 5 years.
Also in 2010 the G20 countries collectively agreed to reform the executive board and quota amounts of the Fund. These reforms will give the emerging economies, such as China, a larger say in the quota and voting rights within the IMF.  Though the reforms reduce the US influence within the organization and increase the influence of China, some within the PBoC feel they do not go far enough to balance the system or accurately represent the growth of China within the international financial system.
Though these reforms have been agreed upon by all member countries, including America, the Republicans in Congress have continuously blocked passage of legislation which is required to support the changes to the executive board and the quota amounts.
Much debate and analysis has been offered over the last few years to help explain why Republicans in Congress are blocking the legislation in defiance of the US Executive Branch and Treasury.  Any benefit to the GOP for blocking and delaying the reforms are minimal, such as political advantage over the Democrats and using the reforms as leverage to get other bills passed, such as the Keystone XL Pipeline.
The demands and pressure from the rest of the world to have the reforms enacted as soon as possible doesn’t seem to hinder the Republicans attempts at further delays.  The G20 and the IMF have openly stated that if the reforms are not passed by the end of the year the US Congress will be bypassed and the reforms will be separated into smaller items which can be implemented one at time which would not require any Congressional approval.
If such an action is taken American influence in the Fund will be dramatically reduced and could potentially lead to a situation where a coalition of countries within the IMF join together to exercise veto power over the United States.
So it is obvious that there are no benefits to the United States for delaying the reforms further.  Which begs the question, if the US and the Republicans have nothing to gain in delaying, who does?
China could make a strong case that the 2010 Reforms do not go far enough in restructuring the Executive Board of the Fund and the adjusted quota amounts do not accurately reflect the growth of the countries GDP in the 5 years since the agreement was made.
But is that cause enough for China to want the reforms to be delayed?
Perhaps not. But when we consider the growth in not just China’s GDP since 2010, but also the broader internationalization of the renminbi in that same amount of time, there is a stronger case for China wanting to not just delay the reforms, but bypass them altogether.
Failure by the Republican lead Congress to pass the required legislation is quickly leading to a situation where China will get exactly what it stated it wanted back in 2009, namely an international reserve currency which is not directly connected to any one national currency, including there own, and having their currency, the renminbi, added to the SDR basket composition.
The only difference now would be that the RMB will be added to the SDR basket at a much larger and more valuable weight than it would have been back in 2010, if the reforms had been implemented at that time.
The other component of Governors Zhou’s 2009 statement was having a percentage of foreign reserves centralized under IMF management. The fact that the large volume of Bi-Lateral Swap Agreements between the PBoC and other central banks around the world has increased the foreign holdings of RMB does much to help China leverage their currency within the structure of this SDR liquidity exchange.
The longer it takes to implement the reforms the more likely the US will become a less attractive supplier of high quality financial assets, especially if the coming liquidity crisis can be blamed on the unwillingness of Congress to act on reforming the international financial system.  The capital losses on central bank “outstanding dollar” reserves will create a demand for alternative financial assets to increase liquidity.
Enter SDR bond liquidity.
In order to have SDR liquidity accepted it must compete with and overcome dollar liquidity demands, as well as restructure foreign exchange markets so traders move from USD to SDR assets. The likely scenario of a global liquidity crisis compounded by the inability of central banks, including the Federal Reserve, to increase global liquidity, will create the required demand for SDR bonds.
The liquidity exchange of foreign reserves for SDR reserves, and having those assets centrally managed by the IMF, will in essence make the Fund a global central bank, meeting the mandates of the Bank for International Settlements and its Basel 3 targets for bank liquidity.
For its part, China, at the behest of the BIS, is playing a strategic game with both political parties that make up the American system of governance, ensuring plausible deniability for all involved.  The Republicans will likely be the ones to take the hit for their reluctance to pass the reform legislation and support the transition to a more stable and multilateral financial system, ensuring a Democratic win in the next presidential election.
The immigration amnesty of Obama is expanding the voter base for the next election in two years which will maintain the viability of both political parties.
The Koch brothers are some of the largest supporters of the Republican party and are the power behind both the GOP and the Tea Party. It would be absurd to think that the Republicans are holding up the 2010 IMF Reforms for reasons which have nothing to do with the interests of Koch Industries.
Every IMF Reform bill presented by the Democrats has contained a provision for an IRS Rule Change which alters the tax exempt status of non-profit political organizations. The Republicans have demanded that the IRS Rule Change be removed in order for any IMF Reforms to move forward.
The IRS Rule Change could potentially reveal the 3rd party source of political contributions and donations, which is why the GOP cannot agree with its addition on any IMF bill.  The Democrats, wanting the reforms to be quickly implemented, and have so for the last 5 years, have been attempting to strengthen the US position within the emerging multilateral system, while the Republicans have been postponing the reforms which has served to continuously weaken the American position.
As stated above, the only one who benefits from this arrangement is China, as it has bought them valuable time to internationalize the RMB and increase its weight in the foreign reserves of central banks around the world. In order to expand on this we must connect China with both Koch Industries and the Republican Party.
Interestingly enough it was Koch Industries founder Fred Koch who was one of the designers of the John Birch Society. The JBS is mandated with spreading the communist philosophies of centralization within western societies.  When we consider the slow implementation of socialist and communist policies within the governments of the west, we can quickly determine that the John Birch Society, and its members, have been extremely successful.  And now we are on the verge of a global system of centralization, as mandated and described by Governor Zhou’s request to have the foreign reserves of “central” banks “centralized” under the management of the IMF.
Koch Industries has many subsidiaries, one of which is Flint Hills Resources, which has divisions in Canada, along with a huge stake in the Keystone XL Pipeline, as well as a division in Hong Kong.  There are many other Koch subsidiaries with ongoing interests in China, and I would encourage the curious reader to investigate further.
Back in 2012 the Democratic Congressional Campaign Committee, or DCCC, made accusations that a Las Vegas casino owner who made large donations to the GOP, was in fact funneling political donations from China, through his casinos in Las Vegas and Macau, to the Republican leadership.  These donations came to be known as Chinese prostitution money.
The business and political connections between Koch Industries and this casino owner, Sheldon Adelson, are numerous and plenty.  Adelson denied the connection with the “Chinese prostitution money” and threatened a lawsuit against the DCCC if they did not retract the accusation and print an apology, for which they did.
The television drama House of Cards portrayed a similar story in its second season. In a version of “the revelation of the method”, the Chinese in the House of Cards story funnel money through a native owned casino to an American industrial titan who than makes political donations to the Republicans.   The Democrats figure out the scheme and confront the Chinese, who in turn demand the passage of a bill supporting the construction of a large infrastructure project in America from which they will profit hugely.  The Democratic VP agrees and the illegal political donations, or “Chinese prostitution money” stopped going to the Republicans.
When we have these kinds of connections between American industry, as represented by the Koch interests, and additional connections between both the Koch interests and Republican interest with China, one can only speculate on the reason for the Republican delay on enacting legislation supporting the 2010 IMF Reforms.
The reaction to the failure of the Republican lead congress to implement the reforms is exactly what China wants in order to complete its rise within the framework of the multilateral system.  As long as the end result fits with the larger macro mandates of the Basel 3 Regulation of the Bank for International Settlements, the children can continue to play in the school yard.

Plausible deniability exists on all sides as the coming liquidity crisis further establishes itself and the demand for SDR liquidity is constructed. And to think we are only in the beginning of this liquidity exchange.  – JC
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