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Richard Russell on China

January 20, 2011

Does anyone know what China really wants and in which direction China is going?

The Russell answer: China wants to be the most powerful financial power on the planet. Note that I said China wants to be a "financial power," not a military power. Militarily, China simply wants to neutralize the US, and be on a military level with the US. China knows that nobody can win the next major war between super-powers (both sides would be utterly destroyed).

China's initial financial strategy -- to make the yuan (renminbi) the world's leading currency. China wants the yuan to take the place of the US dollar in world trade and they want the yuan to be the world's reserve currency. China is going about this in slow, deliberate steps.

First, China is making strategic alliances with a long list of nations. This means that they will trade, using currency swaps in China's currency, the yuan. This will result in eliminating trade in US dollars. The Chinese alliances include Malaysia, Belarus, Hong Kong, Indonesia and more recently Brazil and Argentina.

China is also moving to create currency swaps with the Arab nations. More ominously, this means that China ideally wants oil quoted and traded in yuan rather than as it is currently quoted and traded -- in dollars.

What's behind China's new strategies? The fact is that China has been smarting under many decades of bad-mouthing and disrespect. China is a nation of 1.3 billion hard-working people, a nation pulling itself out of deadening poverty and fast-becoming the leading economy of the world. Today, no trend or major deal is transacted without considering it's affect on China or China's affect on the transaction.

It's obvious that China wants the yuan to be the world's new reserve currency. Ask yourself this -- if you are dealing with a currency, would you rather deal with the currency of a nation with a huge hard-working population, a nation with the largest reserves on the planet -- or would you rather deal with the currency of a nation drowning in debt, a nation who's currency is in a multi-decade decline, and a nation which is steadily losing its productive and manufacturing capabilities?

The next step in the progression is for China to make its yuan convertible. China wants the yuan to take the place of the dollar. It wants the yuan to be the world's leading trading and safe-haven currency. More than that, China is in a headlong rush to build its reserves of gold. Recently, China asked the IMF to create a new reserve currency, a mix of three or four leading currencies with the yuan and gold as two of its components.

China quietly has become the world's largest producer of gold. Furthermore, China's leaders have been urging their people to accumulate gold.

Unlike the US, China sees gold as a symbol of power and prestige. I believe that China is thinking that in due time, it will back the yuan with part-gold, thereby making the yuan far preferable to the US dollar, which is backed by nothing tangible. Today. the dollar is backed only by the "full faith and credit" of the US government.

So it's interesting and rather frightening, while the US creates billions (trillions) of dollars out of computer transactions, all in an effort to save its banking system, China is spending part of it giant dollar hoard to buy up the resources of the earth. China already has a near-monopoly in rare earths. China is buying mining companies where ever it's feasible. China is buying arable land in South America and Africa. If it's a valuable resource, if it's for sale, China wants to buy it.

All this is happening while the US debates the suitability of gays being in its armed forces.

Item, River Court City, Goldman Sachs' headquarters in London, has just been bought by China through a company called "Chinese estates."

Item, Tim Geithner and Hillary Clinton continue to berate China and tell China what it should be doing. China is doing exactly what it wants and what serves its own interests, and surprisingly, China is not interested in the plans that the US has for it.

Housing: China's leaders are worried about the housing bubble that has formed in China. In an effort to let the air of the bubble, China has increased its bank reserves and raised its benchmark interest rates. Thus has resulted in a sharp drop in its stock market (eblow, a chart of the Shanghai Composite Index as of Friday's close).

Richard Russell

Editor-in-chief - DOW THEORY LETTERS


The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.

Gold is impervious to rust.
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