Photo by  epSos .de  via Flickr . Some rights reserved.

The Clash of the Titans

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Friday, 4 September 2015 - Last Updated on September 4, 2015
Photo by  epSos .de  via Flickr . Some rights reserved.

The currency war did not just erupt a few weeks ago as many might imagine from the reports.

Photo by  epSos .de  via Flickr . Some rights reserved.

Photo by epSos .de via Flickr . Some rights reserved.

As much as the increasingly worsening disputes among Asian neighbors over the sea routes and aquatic, submarine and subterranean resources in the disputed South China Sea is not about a petty fight between toddler economies but instead is actually a proxy war between two of the most mature and greatest economic and military superpowers of the modern world, so too is the continuing currency wars waged between the Chinese Yuan and the American Dollar.

The currency war did not just erupt a few weeks ago as many might imagine from the reports that only occasionally intrude into our parochial and petty political headlines from the foreign wires. What happened recently, the deliberate devaluation by as much as 2% of the Chinese Yuan was merely the latest skirmish in festering hostilities between two great protagonists battling for global supremacy; two unparalleled titans whose military strength and war-making powers applied against each other remain essentially untested, superiority between the two, undecided. In that the rest of the world remains fortunate. Somewhat.

But there are other battlefields. In one, where international trillion dollar debts and obligations are ordnance, China has the upper hand over the United States.

To climb out of the recession that the U.S. had inadvertently gotten itself into as it tried, quite stupidly, to bloat gross domestic productivity with cheap loans extended to the worst debtors, including blindly funding a controversial bailout of its not-too-innocent and conflicted banking system following the subprime crisis’s’ post-2008 aftermath, the U.S. Was compelled and has had to sell its sovereign papers overseas and of its diversified buyers China currently holds about a fifth of all its debt papers while the U.S. outstanding debt as of last week totaled US$18,151,237,646,318.35.

Count the comas. Now breathe. It is a misconception that the U.S. is the world’s biggest creditor. It is not. It is the world’s biggest borrower and the ignominy of being the world’s bigger lender belongs to China.

The tact is however as sly as a Chinaman’s uncanny and unorthodox manner of doing business. By purchasing a fifth of those U.S. debt papers China has kept its Yuan from soaring thus purposely keeping its currency in a relatively devalued state, a deliberate mercantile strategy continuing from a long pursued gambit to keep its currency lower than the American dollar.

Purchasing those and now holding as much as US$1271.2 billion in debt papers, mainland China is easily the U.S.’s biggest creditor.

This did not happen overnight. Its been going on for nearly a decade. Perhaps even longer. And it is not as if the U.S. did not have a hand in it.

Photo by  epSos .de  via Flickr . Some rights reserved.

Photo by epSos .de via Flickr . Some rights reserved.

Long before the U.S. shot itself in the foot by issuing below prime papers, consolidating these into asset-backed securities and infecting the global financial markets by exporting these to unwitting investors, the U.S. virtually weakened itself by importing more from China than it sells to that emerging behemoth.

By inadvertently shunning inexpensive employment and outsourcing labor overseas and away from the U.S. mainland, whether these be menial or technical, and thus, in effect, transferring its critical manufacturing capacity to China thinking that the widened margins from the cheap labor that China offered against the higher prices charged on finished products was sustainable, the American economic managers bungled and opened themselves up as currency war victims.

It is easy to see that the U.S. is partly to blame for prematurely creating a superpower out of political adversary. In effect, when one economy outsources to another, it eventually repurchases those and thus imports. In a sense, the U.S. imports Chinese labor thus adding to its liabilities already in the hands of the Chinese.

The effect was an imbalance. Chinese goods, from the perspective of the Americans, was cheaper as the dollar was stronger. On the other hand American goods were more expensive.

So Americans bought and the Chinese sold.

Unfortunately the Americans bought more than they sold to China. That did not bode well for U.S.-based manufacturers, food producers and its agriculture sector that collectively imagines China, with its ever increasing population of consumers, as a viable market for American-made goods. Catering as it does to a global market, rather than purchase from the West, China’s economy quickly heated up as its manufacturing sector started to supply the whole planet everything from knock-off apparel and fake Rolexes to high technology computers and supersonic aircraft.

The ongoing currency war is a throwback to the days of ancient European mercantilism and the old albeit discredited doctrine of the mercantile wars where nation-states competed and the spoils went beyond territory extending to the control of trade, trade routes and currencies. The paradigm is based on the idea that states and economies most compete rather than cooperate. It implies protectionism and high tariffs. It implies captive markets and colonies as supply sources. To appreciate, simply think of the old spice routes.

Photo by Jason Wesley Upton via Flickr. Some rights reserved.

Photo by Jason Wesley Upton via Flickr. Some rights reserved.

Today, China continues to wage the same type of mercantilism. Its warring strategy aptly labelled “Beggar thy Neighbor” involves the deliberate devaluation of its currency to force the cost of its exports down and create policies that render importation difficult if not impossible.

Unfortunately the strategy inflicts debilitating collateral damage to neighboring economies within its blast radius. For one, it weakened the peso to a five-year low making our foreign-denominated debt more expensive. The yuan devalued by only 2%, yet the peso fell by as much as 4.0%.

The weak peso also exerts upward pressures on aggregate prices thus aggravating the non-inclusive growth albeit one brazenly boasted by a bungling bureaucracy intent on perpetuating itself.

Corporate assets likewise fell by 6.7% erasing all gains earned since the start of the year. Worse, some corporate incomes fell by over 8% compared to last year’s data while FOREX losses hit over Php 1.1 billion. To gain a deeper perspective into the effects of these currency clashes, mull these over as you watch China’s televised arms parade where over 80% of its state of the art weaponry had never been seen by the western world.

Dean de la Paz (78 Posts)

Dean dela Paz is an investment banker. He is a consultant in the fields of finance and banking and has packaged some of the most prolific public offerings in the Exchanges. He is a member of the Executive Committee and sits in the Board of one of the oldest financial institutions in the country. He is likewise an energy consultant having served on the Boards of several foreign-owned independent power producers and as CEO of a local energy provider. He is currently the Program Director for Finance in a UK-based educational institution where he also teaches Finance, Business Policy and Strategic Management. A business columnist for the last fifteen years, he first wrote for BusinessWorld under the late-Raul Locsin and then as a regular columnist for the Business Mirror and GMANews TV. He also co-authored a book and policy paper on energy toolkits for a Washington- based non-government organization. He likewise co-authored and edited a book on management.


About Dean de la Paz

Dean dela Paz is an investment banker. He is a consultant in the fields of finance and banking and has packaged some of the most prolific public offerings in the Exchanges. He is a member of the Executive Committee and sits in the Board of one of the oldest financial institutions in the country. He is likewise an energy consultant having served on the Boards of several foreign-owned independent power producers and as CEO of a local energy provider. He is currently the Program Director for Finance in a UK-based educational institution where he also teaches Finance, Business Policy and Strategic Management. A business columnist for the last fifteen years, he first wrote for BusinessWorld under the late-Raul Locsin and then as a regular columnist for the Business Mirror and GMANews TV. He also co-authored a book and policy paper on energy toolkits for a Washington- based non-government organization. He likewise co-authored and edited a book on management.

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