China Dollarized More Than Ever

The quickest path to de-dollarization is devaluation. China has accomplished very little in the way of dedollarization over the past decade. They've mainly dedollarized their FX reserves, effectively going short the dollar amid a bull rally. If the dollar keeps rising....

The position here is the same as it has been for years. Major yuan devaluation is coming, either before or after a major political conflict. Back in 2014 I though they'd devalue and the U.S. would retaliate with tariffs. Now tariffs are already coming back, there is a trade war, tensions in the South China Sea are rising, the U.S. blames China for the coronavirus outbreak, Hong Kong national security law, plus issues such as Uighur internment, cyber espionage, banning TikTok, blocking Huawei, arresting spies in U.S. universities, the list goes on. At some point the relationship can bend no more and China stops worrying about the political fallout from the necessary plunge in the yuan's value.

All fiat currencies must fall given debt levels, but the choice is the dollar takes everyone down together, or the other currencies devalue versus the dollar.


ZH: The Dollar "Has Us By The Throat": Chinese Official Urges Gradual Decoupling Of Yuan Ahead Of "Full-Blown Escalation"

In a brief outline presented separately by Nikkei, Zhou's position is that the Chinese must prepare:

1. For the deterioration of Sino-U.S. relations and the full escalation of the struggle.

2. To cope with shrinking external demand and a disruption of supply chains.

3. For a new normal of coexisting with the novel coronavirus pandemic over the long term.

4. To leave the dollar hegemony and gradually realize the decoupling of the yuan from the dollar.

5. For the outbreak of a global food crisis.

6. For a resurgence of international terrorism.

Again, such a grim position forecasting isolation is nowhere near the official Chinese Communist Party line, but represents a predicted necessary future reaction to full-blown long lasting conflict with the US.