August 21, 2015
For at least the last decade, China has been positioning the renminbi to take over as the world’s reserve currency.
Over the years they’ve gradually established credibility for the currency on world markets, and have begun strategically chipping away at the institutions cementing the US dollar’s dominance.
Many value investors have given up on their strategy over the last 15 years amid concerns that value investing no longer worked. However, some made small adjustments to their strategy but remained value investors to the core. Now all of the value investors who held fast to their investment philosophy are being rewarded as value Read More
This year, there was a chance they could be catapulted towards that goal.
Because this year, the International Monetary Fund was scheduled to reevaluate which major currencies its reserve currency, the SDR, should be pegged to.
If the renminbi were to be included in this basket, that would have confirmed its international importance.
And as the IMF only makes this decision once every five years, the pressure was really on.
Frankly the IMF was in a pretty tough position.
On one hand, not including China’s renminbi in the SDR this year would be a signal of how out of touch and irrelevant the institution has become.
But on the other hand, by including the renminbi, the IMF would be capitulating to the idea that China has overtaken the West, and that the dollar-denominated financial system is finished.
Tough call—damned if they do, damned if they don’t.
Just a couple weeks ago I wrote to you predicting that the IMF would crush China’s hopes of joining the SDR this year. And that’s exactly what happened.
When China’s stock market started to slide a few months ago it was a gift in disguise to the IMF. It wasn’t that China’s financial markets were thrown into chaos. Those things happen from time to time, especially when economies are so bloated on fiat paper.
The real problem was how the Chinese government reacted to it, scrambling to fix the situation like trying to catch a falling knife.
They froze stock prices. They jailed short sellers. They even tried whipping retail investors into a frenzy, pushing them to go out and mortgage their homes to buy more stocks.
The string of authoritarian measures they implemented looked plain desperate and amateurish, leaving the rest of the world thinking, “same old China.”
Thus, China’s 10+ years of trying to convince the world that they are serious and credible were in vain.
It was all the excuse that the IMF needed to exclude the renminbi this time around.
They weren’t even set to make this decision for another couple of months, but seized the opportunity to do it now.
Any celebrations on the part of Western countries, however, would be misguided.
This doesn’t actually change anything for them.
You see, China is not the biggest threat to America’s dominance. The United States government is.
The more they borrow, print, regulate, and intimidate the closer they bring themselves to the brink of collapse.
Whether or not China is in the picture, that financial reality will still catch up.