Is A Sino-US Currency War Imminent?

The United States has become more and more defensive against China because of its rapid development and the change of the comparison of strength between the two countries. "China Threat" theory increasingly attracts much more attention from the US media. Chinese political and economics author Lei Sihai believes that the United States is actively pursuing a "currency war" against China through a puppetry of elaborate political, military and media maneuvering. Using financial instruments as "direct weapons," Lei claims that the United States is gearing up to engage China in a currency battle come 2015 in his new book The Decisive Battle: the Imminence of Sino-US Currency War. The author shared his thoughts on the subject matter and his book in the following interview to better express his viewpoints to potential readers.

An interview with Lei Sihai, author of a new book 'The Great Decisive Battle: the Imminence of Sino-US Currency War.'

Q: Could you briefly explain how a currency war is brewing against China?

L: A few days ago, one of my Chinese American friends sold his apartment in Beijing, which he bought, but held under his domestic relatives' name, in 2008. At that time, the exchange rate was 1USD / RMB 7, but today the rate is 1 USD / RMB 6.2. He has made USD 700K by selling this apartment, which was only worth USD 200K if we account for the appreciation of the RMB and housing prices rising. My friend also told me that he sold his apartment to achieve "bottom fishing." At that time, China was in the midst of a financial crisis, during which the RMB depreciated and the price of domestic assets decreased sharply. If we assume my friend as billions or even trillions of foreign capital, the United States will despoil China's numerous assets. This is the so-called currency war.

Q: Does the US put forth its supposed strategy for the currency war?

L: I think so, but it's impossible to see any public statements in official documents from the White House or the Federal Reserve. However, we can get this answer through its policies. The first policy is a stress test designed by the Federal Reserve.

Since the subprime mortgage crisis in 2008, the Federal Reserve began to take an annual stress test for large financial institutions in the United States. The last four times they were tested went well, but the fifth test had two unusual results; the first is that the Federal Reserve predicted that the economy will take a sharp downturn in the second quarter of 2015. It is estimated that the economy and market capitalization will decrease at a rate of 5 percent and 50 percent, respectively. Likewise, the rate of unemployment will increase to more than 12 percent and housing prices will continually decrease by approximately 20 percent. All these predictions are much worse than the situation in the period of the subprime mortgage crisis. The second thing the Federal Reserve predicted is that the economies of China and other Asian countries will slow in growth.

How does the Federal Reserve describe the relationship between two unusual scenarios? The United States thinks that China's slower economic growth will lead to a great economic bust in the US, but it is obviously unreasonable. The United States is the biggest economy in the world and its economic development mainly depends on its domestic demand. During the past 100 years, external factors never became the cause of financial crisis in the US. The crises, including the Great Depression in 1929, the Great Stagflation in 1970s, and the Subprime Mortgage Crisis, were all caused by its internal factors. Instead, after the US became the biggest financial empire, other nations' economic crises has boost the US asset prices because all funds flow into the US. For example, during the five years of South-East Asia's financial crisis, 1 trillion dollars flowed into the United States, which boosted a new record-high in US stock markets. Therefore, China's slower economic growth will lead more money to the US and buy more US assets. So, how could US stock market go bust?

The real situation is that a big shock to the US economy will cause slower economic growth in China and other Asian countries, but "slower" is a nominal word. In fact, the Federal Reserve is producing a big reversal of the US dollar through flow global assets to the United States is aiming to break China's asset bubbles and create an economic crisis in China. However, because the US economy is not really recovered, the strong dollar policy characterized by the interest rate rising will possibly cause a big crash for the US asset price, which is precisely the worst situation predicted by the Federal Reserve.

Q: Why is the strong dollar policy only against China? Will it have the same impacts on other countries?

L: This is a good question. Why we say this policy is only against China is because a weapon employed in a currency war is not only the currency itself, but also geo-politics, the economy, trade policies, currency policy and even the media, among whom China is the US's prime target.

In terms of geo-politics, the United States is strategically shifting its attention to east. After withdrawing troops from Iraq and Afghanistan, the US has saved about 120 billion dollars in military expenses. But compared with the military expenses in 2012, there is no big difference in 2013, which means that US increased approximately USD 100 billion worth of military expenses in the West Pacific, especially near China.

At the same time, the United States shifts its eyes to South-East Asia. This policy, proposed by Secretary of State's Hillary Clinton in 2009. The main purpose of this policy is to prohibiting the internalization of the RMB. Secondly, the US and Japan show their cooperative relations and consensus on currency policy regarding the Diaoyu Island issue. The US acquiesced to depreciate the Japanese Yen, which locks up Japanese debt held by China at around USD 300 billion, which cost China USD 60 billion. Third, The United States established the Trans-Pacific Partnership, but excludes China from the partnership to prevent China from further integration with neighboring countries. Fourth, since 2005, the US has forced the appreciation of RMB by all means. So far, the RMB has appreciated by 20 percent against the USD, which attached hot money into China and in turn boosted Chinese asset bubbles. However, the US acquiesce to other currencies' depreciation instead.

The US is not taking these kinds of actions against any other country or region. Therefore, it's reasonable to make the conclusion that this currency war is being waged mainly against China.

Lei Sihai, author of 'The Great Decisive Battle: the Imminence of Sino-US Currency War.' [Photo: weibo.com]

Q: Why does the US agree to fight this battle at so BIG risks?

L: The US has to do this. America has to find sources of profits for its financial assets, which are valued at almost 700 trillion dollars, including all kinds of financial derivatives. If 1 percent of profit per annum is required, 7 trillion dollars in profits are required to support 700 trillion dollars financial assets. Otherwise, asset prices will plummet.

Finance itself cannot generate profits and the final source of profits is mainly from the real economy. The US GDP reached 15.6 trillion dollars in 2012, but the real economy accounted less than a half--approximately 7 trillion dollars. How can the US generate 7 trillion dollars in profits from the real economy every year? It is obvious that the US needs support from external real economies. China is the biggest external real economy for the US, so this is precisely why the US proposed "Sino-US" theory. The US actually regards China as the source of profits for its financial assets. But China has rejected the G2 mode characterized by "Made in China, Consumption in America".

The US intends to place China in a financial crisis, which could make China's economy paralyzed for five or even 10 years, so that they can purchase lots of assets from China at a low price and solve the problem regarding their sources of profits. Besides, the ease in monetary policy in the US will lose its effects to enhance US GDP around 2015, as Japan had experienced in the past. After the breakdown of the economic bubble at the end of 1989, Japan finally suffered a great depression for 15 years, despite experiencing economic growth for five years by an ease in monetary policy, which outlived its usefulness in 1995.

Nowadays, the United States adopts an ease in its monetary policy in the same manner Japan did in the past. The ease will lose its effect on economic growth in 2015. In order to avoid the deflation and economic stagnation fate that Japan suffered, the US has to provoke a currency war, although it not end well for the US, either. In that respect, the United States has the unique advantage compared with Japan.

Q: Is this a "conspiracy theory"? Why do you think this is a war?

First, I object that this is a "conspiracy theory" and we should not take for granted that everything could be a conspiracy controlled by America or some elite group. Recently, in order to fight against being painted with the "conspiracy theory" brush, we didn't even recognize or believe this is the US's financial strategy. There is a saying: "awkward conspiracy theory is the best friend of conspiracy."

My new book The Great Decisive Battle: the Imminence of Sino-US Currency Wars objects to the term "conspiracy theory". But the US financial strategy objectively exists. It is reasonable for every country to adopt a similar strategic plan if it were the biggest financial empire like the US. In fact, when we look back on history, we will find that that we are now in the eve of the third cycle of the US financial strategy.

The first cycle was from 1970 to 1985; the second one was from 1986 to 2002. Coincidently, the first two cycles of the financial strategy both lasted 15 years, during which the US dollar experienced depreciation for 10 years and appreciation for another five years. As this regular pattern shows us, the US dollar should greatly appreciation in 2012. This is the main reason why both China's experts and foreign scholars made such predictions as the US will boom and China will suffer.

However, such predictions fail to consider the change of circumstances and history did not repeated itself precisely. The third cycle of the US was disrupted by the subprime mortgage crisis. That is why the decisive financial war will take place around 2015 rather than on 2012. During the first two cycles of the US financial strategy, European countries became economically paralyzed for five years, Soviet Union collapsed, Japan experienced a 15-year depression, South-East Asia, Russia and South Korea all failed to realize economic growth within seven years and Argentina and Mexico also were placed in stagnation for six years.

However, the United States faces two competitive enemies in the third cycle--the whole Euro-Zone and a rising China. The US has never gone directly head-to-head with China in a currency war. If China is defeated in this war, the US will find many sources of profits and all problems for its financial assets will get resolved. At that time, the Euro-Zone will be easily defeated in a currency war with the US because it cannot expand anymore.

If so, there will hardly be any obstacles for the US financial strategy in the long term and the world will be controlled by the US, as is their aim. And the G2 mode will be enlarged and continued. Hence, this is not only a great financial war, which can decide the future of the world, but also a currency war on an unprecedented scale, which can greatly influence the allocation of global assets.

Q: What differences are there between your new book and others related to currency wars? Is there any subversive idea in your book?

L: Yes, there is. I have demonstrated completely a different concept of currency wars and showed the opposite logic from others' books. Previous authors thought most wars in human history are currency wars, including the First World War, the Second World War, the American War of Independence, the Napoleonic Wars and even the wars in ancient China. But all of these are only the financial phenomenon rather than currency wars.

I think the real currency war came into beings because Nixon disconnected the US dollars with gold, which is also a new form of war in the era of cash hegemony. Currency wars cannot start without the cash hegemony because every country needs to output its own cash in the wars. However, when the gold standard or precious metal standard were popular around the globe, no country wished to export their own currencies. For example, the British prevented the exportation of the currency by all means in the 19th century--so did America before 1971. It is easy to understand that the reduction of precious metal means the decrease of the currency issue, which will bring shrinkage to the economy.

Therefore, in that era, actual war was the main way for a country to plunder treasure. The losers had to cede territory and pay an indemnity or give up their interest such as tax rights in customs. The control and robbery of finances is only the result of the wars. However, in the wake of the disconnection between dollar and gold, the most profits were obtained from outputting currency for the biggest nations, while small nations have no ability to accomplish that.

After conquering Iraq, the first thing the US did was output dollars there. From the beginning of disconnection to 2010, the United States reached a total output of 32 trillion dollars through trade deficit at an amount of 11 trillion dollar output and another 21 trillion dollars through external investments. But how many assets of the US does every country hold now? Twenty-two trillion dollars; that is to say, the debt the US owes other countries, which are in the vicinity of 10 trillion dollars, disappeared through the currency wars. The United States possesses others assets, about 10 trillion dollars' worth, for free.

In fact, the output of paper money means the temporary possession of other nations' assets. The United States, a nation of currency hegemony, depending on its privilege in currency output, intends to change the trend of current asset, increase volatility to the exchange rate, and cause more asset bubbles, where it can finally take possession of other nations' assets. Accordingly, US assets held in other countries will be offset, which contributes to the permanent possession of other's property. This is a perfect transformation from the "temporary" possession to a "permanent" robbery.

This is real currency war without blood and fire. But the result is similar to the aftermath of actual war, albeit without blood.

Q: Who will win this war?

L: Before we discuss this question, we shall define the victory and failure first. In this war, the US has to obtain victory, otherwise it means failure. If they failed in this war, the US will fail to find the sources of profits for its 700 trillion dollar assets and will suffer the same deflation Japan did in the late 80s. Meanwhile, it will also face a debt-increase and lose its hegemony in currency. But China only needs to remain undefeated, which means China's victory is more attainable.

As long as China can avoid the big financial crisis, our GDP could remain increasing at a rate of 7.5 percent in the next 10 years. So we will soon surpass the US in the near future.

We cannot imagine that the United States, as a great financial empire, could allow itself to be surpassed in GDP. Otherwise, there is a big question to ask: If ranked second in GDP, how does the United States sustain the price of its financial assets? Nowadays, US financial assets valued at almost 700 trillion dollars, while China only possesses 30 trillion dollars of those assets. Once surpassed by China in GDP, the US will face the big crash of its financial asset price. So the US pays close attention to this problem and, through changing the method to calculate GDP, increased its GDP by 3 percent overnight. But it is said that the change will lead to a five-year delay for China to surpass the US in terms of GDP. It also reflects the US's concern regarding this challenge.

I'm very optimistic about this war. I think the United States will fail in this long-term financial strategy and also in the reversal of the US dollar. This is because the reversal of the US dollar index will not exceed 103, which was once a critical point to trigger Thailand's financial crisis in 1997 and also important to overthrow the financial asset price of the Western European countries in the 1980s. In fact, if the Federal Reserve cannot take a substantive strong dollar policy, such as increasing the interest rate of federal funds, the US dollar index could barely exceed 95.

It is unwise to simply accept the ideas of bull market and reversal of the US dollar, which is temporarily rebounding. These ideas will vanish around 2015 and bear market of the US dollar will be popular. This would signal the failure of the third cycle of the US financial strategy.

The United States cannot continue the success it saw in the last two cycles and will fail to possess other nations' properties, especially in China. China is the biggest economic driver and contributes to the world's economy three times more than the US. As long as China can get far away from a big financial crisis, other developing countries will not face big financial depression and the strong dollar policy will lose its effect. Finally, we will come to a de-Americanized world, where the US economy will gradually disconnect from the globe.

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