Chapter One:
The Dollar-Renminbi War

Chinese dollar reserves from export earnings were rapidly approaching the staggering sum of $1 trillion by the end of 2005. That in effect meant that the US Government could run huge deficits to cover the costs of its wars in Iraq and Afghanistan, and be assured that China had almost no choice but to invest its growing dollar trade surpluses into US Government debt.

Alarm bells ring in Washington

By the middle of the first decade of this century, around 2005, China’s unprecedented rate of economic growth began to set off alarm bells on Wall Street and in Washington.

In August of that year, China and Russia carried out their first joint military maneuvers, Peace Mission 2005, an 8-day training exercise on the Shandong peninsula.[1] It was a strong indication that the one geopolitical alliance Washington was most afraid of – namely, a political, military and economic alliance between former foes and former allies Russia and China – was imminent. The brazen US military occupation of Iraq two years earlier in March 2003 had sent shock waves around the world.

In Beijing it was duly noted that Washington’s strategy was not about anything other than raw power.

Washington’s response to the growing independence of Eurasian powers – China, Russia and the other nations of the Shanghai Cooperation Organization – was not long in coming. It began with a verbal attack on China’s currency policy.

US is the real “currency manipulator”

The US Government began what was to become an ongoing verbal pressure campaign against what they claimed was a deliberate undervaluation of the Chinese currency, the renminbi (RMB), against the US dollar. Soon after the start of the second term of President George W. Bush, Washington began a relentless campaign to pressure China into revaluing the renminbi. The Bush Administration was well aware that the RMB exchange rate is at the very heart of China’s economy, which underpins the nation’s political survival. For that very reason Washington has launched its relentless campaign threatening to label China a “currency manipulator.”

On international currency markets China’s currency was still not fully convertible into dollars or Euros or other currencies. But for accounting valuations of its trade, the Peoples National Bank of China had de facto pegged the renminbi’s value to the US dollar, then China’s major export market.

A sharp revaluation of the renminbi, as demanded by Washington, of between 20% and 40% beginning 2005, would have hit China’s exports severely, creating economic difficulties.[2] However, a drastic fall in dollar export earnings by China would also have meant America’s largest creditor would have fewer dollars with which to buy US Treasury bonds and the US home mortgage debt of Fannie Mae and Freddie Mac.

China dollar reserves from export earnings were headed rapidly towards the staggering sum of $1 trillion by the end of 2005. In effect, that meant that the US Government could run huge deficits to cover the costs of wars in Iraq and Afghanistan, with the assurance that China had almost no choice but to invest its growing dollar trade surpluses into US Government debt.

A perverse, unholy alliance was developing between the sole hegemonic superpower United States and the world’s fastest growing economy, China. Washington never intended for China to massively revalue. It was a bluff, a pressure point to begin making Chinese officials nervous about their future economic security. It was the beginning of Washington’s “Target China” strategy.

To ease the growing pressure from Washington, Beijing began in 2005 a policy of slow and cautious revaluation of the renminbi against the dollar. On July 21, 2005 China ended the fixed RMB-dollar peg, switching over to peg the renminbi to a basket of currencies, including mainly the US dollar, the Euro, the Japanese yen, and the Korean won.[3] By 2008 the RMB had risen some 20% against the US dollar, a major concession to the nominal US demands. Because the real US agenda is not about weakening Chinese exports, but rather about putting pressure on China to weaken her overall economy, there was no end to Washington’s currency wars.

With instant globalized financial and trade relations, a nation’s currency security is even more critical than energy security. At the heart of this stability is the world reserve currency system. Since Washington largely wrote the rules of the international postwar monetary order at the Bretton Woods Conference in 1944, the US has resorted to manipulations, lies, cheating and even wars to maintain the US dollar as world “key currency,” the leading Reserve Currency used in international trade. That “key currency” status has allowed Washington to manipulate the value of the dollar because the US remains the sole unchallenged world military leader, even as the health of the industrial economy backing the dollar has rotted much like Thatcher’s England, into a post-industrial rust heap.

Several western economic commentators have pointed out the central irony in the US role as world reserve or key currency. Because other nations must hold large dollar reserves in order to defend their currency against speculative attack – such as hit East Asia in 1997-1998 – they are more or less forced to buy US Treasury debt. In other words, US Government deficits are being financed by the Peoples’ National Bank of China. In effect the Bush Administration was financing its generous tax cuts to rich citizens and its “Global War on Terror” through the Peoples’ Bank of China’s huge purchases of US Treasury bills. This has been called by one noted Harvard professor, Niall Ferguson, “a kind of Chinese ‘tribute’ to the American Empire.”[4]

By 2012 China’s holdings of US Treasury debt were estimated at nearly $2 trillion, a staggering sum that leaves China vulnerable to a sudden dollar collapse.

In fact the only real currency manipulator in the world today is and has been for decades the US Government, not China. Since 1944, the dollar has lost 97% of its value against gold. The US has repeatedly made abrupt and rapid variations in the value of the dollar against other major currencies – often at 30% per year – in the service of its own economic interests. Now, the Federal Reserve continues to devalue the dollar by printing huge volumes of money since the financial crisis erupted in 2007, via successive “quantitative easing.”

In 1985 the US manipulated its exchange rate to its advantage by forcing Japan into the so-called Plaza Accord. The effect of the Plaza Accord led Japan into the trap of the famous Japanese financial bubble, which collapsed in 1990, plunging Japan into a deflation and economic depression from which she has yet to recover. In 1989, Washington forced South Korea also to revalue the won to suit US interests. That, too, was “currency manipulation.” The exchange rate realignments of the past, such as those with Japan in 1985 and South Korea in 1989, have been an attempt by the US to force other countries to adjust their policies in the name of “burden sharing.” The only problem is that Washington never takes its share of the “burden.”[5]

The most colossal US currency manipulation took place in 1973 when, as the dollar was in free-fall against leading world currencies, powerful Wall Street interests, in collusion with Secretary of State Henry Kissinger, manipulated a Yom Kippur Arab-Israeli war that led to a 400% rise in oil prices and a sharp rise in the US dollar that plunged the entire world into deep recession.[6]

By 2009, the manipulation of the value of the dollar through endless creation of new dollars by the Fed led the Chinese Premier, Wen Jiabao, to openly express China’s alarm over the potential threat to the value of China’s then $1 trillion investment in US Treasuries.[7] Because the US dollar remains the world’s “key currency,” Washington and Wall Street are able to use US monetary policy as a central pillar of US economic hegemony, and the floating dollar exchange rate as “a mechanism for plunder,” as some Chinese analysts have rightly called it.[8]

Little surprise then that on 13 March, 2009, Premier Wen Jiabao openly aired his worries about China’s $1 trillion investment in US Treasuries, hinting strongly that China was looking to diversify away from dollars to euros and other major currencies like the Japanese yen and Korean won. The Wall Street-Washington combine responded swiftly by launching the “euro crisis” in Greece in order to weaken the euro and strengthen the dollar, a covert “currency manipulation.”[9]

He Zhicheng of the Agricultural Bank of China, argued that the free-floating renminbi exchange rate demanded by Washington would be a “trap” for China, because it would let foreign contractors determine the value of Chinese labor. In other words, a free-floating rate would surrender China’s sovereignty over her currency to the international marketplace.[10]

In February 2011 the US Treasury, in its much-awaited report, while not quite labeling China a “currency manipulator,” took a tougher line than in past years, saying the RMB is “substantially undervalued,” warning “progress thus far is insufficient and that more rapid progress is needed.” In its December 2011 report, the US Treasury kept up the pressure on China’s currency.[11]

In May 2012 US Treasury Secretary Tim Geithner again pressured China to further revalue the renminbi against the dollar at a time when China’s exports were slowing dramatically.[12]

And at the start of the US presidential campaign of 2012, candidate Mitt Romney said that

“if he were elected president, he would label China a currency manipulator on his first day in office. One of his television ads predicts the expected actions of Mr. Romney’s first day in office, with the narrator saying that, ‘President Romney stands up to China on trade, and demands they play by the rules.’”[13]

The dollar-renminbi wars remain a major pressure on China’s future economic security and sovereignty.

Not surprisingly, by early 2012 the signs were everywhere that the ASEAN+3 nations had grown tired of the US Dollar trade forcing them to “eat the inflation” that was being exported to their economies by Ben Bernanke and the Federal Reserve. There began a series of very rapid moves by these nations to link their collective fates to each other, banding together to create for themselves a currency and equity bloc to rival the West. A cross-border equity exchange that will link the exchanges of all members, with Singapore’s and Malaysia’s connecting first, opened in June 2012. Thailand was to join later in the year. China and its Asian trading partners moved to settle bilateral trade in mutual currency accounts, bypassing the dollar as medium of settlement.[14]

In reality, as with many geopolitical pressure tactics from Washington, the true goal of the pressure to revalue the renminbi was not merely a higher-value renminbi. It was a lever to pressure China to make the renminbi fully and freely a convertible currency in international foreign exchange trade like the dollar or euro, and also to pressure China to open its financial and capital markets fully to the Wall Street giant banks, to the “Gods of Money.” Were Beijing to do this, as demanded by the US Treasury, the Federal Reserve and Wall Street banks, China would be vulnerable to speculator attacks, just as Thailand was in 1997.

The Dollar-Renminbi wars however, were but one flank in the growing campaign to target China. China’s energy security and her access to foreign oil was the second major flank Washington and her NATO allies, especially Great Britain, would target to further weaken China’s expansion into an economic great power.

[1] http://www.worldsecuritynetwork.com/China/Erich-Marquardt-and-Yevgeny-Bendersky-/The-Significance-of-Sino-Russian-Military-Exercises

[2] Paul Bowles and Wang Baotai, “China-US Economic Tensions Expected to Endure,” China Daily, February 27, 2007, http://www.china.org.cn/english/international/200895.htm

[3] Andrew Leung, “Currency War and the RMB: Monetary Policy, Imbalances, and the Global Reserve Currency System,” http://www.andrewleunginternationalconsultants.com/files/currency-war-and-the-rmb.pdf

[4] Ibid.

[5] Paul Bowles et al, op. cit.

[6] For details on the 1973 US dollar manipulation and oil shock see F. William Engdahl, A Century of War: Anglo-American Oil Politics and the New World Order, edition.engdahl, Wiesbaden, 2010.

[7] Ibid.

[8] Ibid.

[9] “China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries,” New York Times, 13 March 2009, http://www.nytimes.com/2009/03/14/business/worldbusiness/14china.html

[10] Andrew Leung, op. cit.

[11] Ibid.

[12] “US Presses China on Value of Its Currency,” Bloomberg News, May 3, 2012.

[13] Keith Bradsher, “China Lets Currency Weaken Risking New Trade Tensions,” New York Times, May 31, 2012, http://www.nytimes.com/2012/06/01/business/global/china-lets-its-currency-slip-raising-trade-tension.html.

[14] Peter Pham, “ASEAN and Looming Currency Wars,” April 30, 2012, http://beta.fool.com/peterpham8/2012/04/30/asean-and-looming-currency-wars/4083/