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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