Date: 03/21/22
Author: Kent Moors, Ph.D.
Late last week, I appeared on Chinese TV to discuss the current situation surrounding US sanctions against Russia and Beijing’s response to them. Following Moscow’s overt invasion of Ukraine, I have suspended all appearances on the three Russian broadcast networks I used to frequent but the Chinese outlet is still open.
There are, however, two requirements that I have insisted upon. First, it must be a live program (with instantaneous translation provided). Second, my interviews and comments cannot be edited in any way. So far, these two provisions have held.
The show producers know that I am in support of the American and Western sanctions as preferential to putting “boots on the ground.” Further, I will not appear if the Chinese government provides any substantive aid to Russia or facilitates any tangible support in bypassing the sanctions.
I am not delusional (enough) to believe that my position has any impact on Chinese policymakers. What will happen is going to happen, whether I approve of it or not. But these days one needs to stand for something as Putin challenges both human mores and international standards of sovereignty and decency.
On the other hand, doing these Chinese programs does provide me a glimpse into what is the official mindset in Beijing in media discussions that remain much more open to disagreement than the pablum propaganda being spurted by taking heads on the tube in Moscow. Sporadically, we can still receive some Russian broadcasts at home via YouTube. That a well-known talk show host showed up Saturday with a Soviet-era hammer and sickle sewn on the sleeve of his red sweater was not reassuring.
Meanwhile, the Chinese are playing their own long game. With the ongoing, and occasionally spiking, crises over Taiwan and the South China Sea continuing to rage, Beijing is in a carefully choreographed dance. This one involves playing both sides despite its policy preferences clearly resting with Russia and against the US.
In such an environment, the Chinese will deflect when possible, agree when advisable, and look out for those occasions in which it can gain advantage by moving away from the primary focus of contention.
Over the years, I have called this a tactical “sidestep.” What is unfolding these days just happens to be the Chinese version of a much older dance.
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This one has emerged as a move to wean some of the global crude oil market from dependence on using the dollar as the currency of trade. In its place, the Chinese have proposed to put its yuan (the name of the Chinese domestic currency when it is used as a unit of demarcation in the national economic and financial system; it is called renminbi when the reference is to the currency as a medium of exchange).
US dollars have denominated virtually all oil trade worldwide since 1974 when US Secretary of the Treasury Willian Simon orchestrated permission for the Saudis to buy Treasury securities outside the normal auction process. That quickly spread to other OPEC oil-producing nations (who also needed some safe place to tuck away their earnings), providing Washington with a much-needed source of credit. Given the suddenly wider prominence of dollars, two other matters took place.
First, just about all oil trade became based on the dollar. From that point on, prices per barrel were quoted in dollars, regardless of where the transaction took place or whose oil is involved. Second, an increasing amount of dollars now had to be held in foreign banks to finance these transactions.
The age of what became known as petrodollars was borne. For the past 48 years, substantial amounts of dollars have been held in foreign bank accounts to facilitate the trade with the domestic currencies of producing and purchasing nations requiring increasing amounts of foreign hard currency (i.e., dollars) to facilitate exchange.
The dollar had become the de facto global trading currency in the aftermath of World War II anyway, with the decision by the Nixon Administration to cut the currency from the gold standard being the final stage. Increasing amounts of assets, both financial and physical, were held in dollars around the world. That made it both a currency of choice and a ready base of liquidity. Both provided an apparent sense of stability and security to global financial networks.
That was interrupted beginning in 2008 with the worldwide credit crunch and the collapse of assets denominated in dollars. That prompted players in other countries – not without reason – to blame the US for the crisis. Yet, even today, some 80 percent of US currency worldwide is held in hundred-dollar bills as it remains the liquid route for all manner of exchange (legal and otherwise).
The criticism of the US in the credit mess that began with subprime mortgages and spread into all manner of assets abroad denominated in dollars occurs because of something else. It is here that the rise of petrodollars became the single greatest contribution to a worldwide conflagration.
The US has been benefitting from something called seigniorage. The term refers to the advantages flowing to a government from the use of its currency. In the case of petrodollars, this has extended that advantage to every corner of the globe. It also has had another plus, one that has caught the eye of policymakers in Beijing.
As more abroad need to keep your currency in their bank accounts to serve as a barometer of trade and that currency does not repatriate (that is, it does not flow back to the US domestic economy), it is not inflationary (at least in the US).
Washington can print more money and so long as it does not come back it is not contributing to national inflation.
Of course, trade in commodities like oil is international, the availability and price of which will be reflected in all economies. That means there will be an impact from accelerating costs as reflected in national inflation rates. This is a matter we have begun experiencing in the US market with the rise in crude prices of late.
Still, this pressure is arising from the oil not the dollars in which it is denominated and which remain abroad. In that sense, seigniorage is still working.
There are significant questions facing the yuan from an opaque domestic economy. Some of these I have addressed in previous Classified Intelligence Brief entries (see, for example, “The Distortion from a Chinese ‘Phantom’ Economy,” Classified Intelligence Brief, February 22, 2021). And these may well limit what Beijing can (or is prepared to) do on this front.
It holds a balance of trade surplus with just about any other region of the world. Some economists might conclude moving oil consignments to the yuan would make sense for that reason. However, there are two major concerns.
First, these positive balances are reflected more in the market value of the traded goods than in their face value in currency. Second, the advantage that balance confers upon China is worked out domestically, allowing the government some leverage in orchestrating “in kind” equivalences to otherwise more serious consequences arising from ill-advised commercial applications of credit.
Even if the yuan does become a medium for crude oil exchanges, those exchanges will for some time be confined to crude delivered to China for its own internal use. The exercise will not translate into conferring any appreciable advantage of seigniorage. Rather, the full brunt of inflationary pressures arising abroad may well flow directly into the Chinese economy on the back of its own currency value. And while the government can (and does) artificially set the currency exchange value at home, it cannot use the yuan to do that with the price of oil abroad.
Saudi Arabia has given notice that it is considering denominating sales to China in yuan, providing thereby a test for the Chinese move. But absent any interest in holding more than a small amount of the currency abroad, this may end up being more a test of Beijing’s legerdemain than anything else. It will not translate into any benefit from “yuan seigniorage.”
The last thing China needs is a continuing rise in crude prices. Since the current trajectory has a direct relationship to the Russian invasion of Ukraine, Beijing’s new oil trading initiative curiously has a vested interest in a quick resolution of the issue attending Russian tanks outside Kyiv.
I made that observation last week during my appearance. At least for the moment, it seems to be resonating with the Chinese.
Dr. Kent Moors
This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it. Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations).
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