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Yuan Clearing Bank Opens in Moscow as Russia, China Dump Dollar in Bilateral Trade


Russia and China accelerate local currency cooperation

Vladimir Putin, Xi Jinping

Moscow and Beijing took another step towards de-dollarization with the announcement of the opening of a renminbi clearing bank in Russia on Wednesday. 

Local currency transactions were first used in both countries’ border regions. Today, more and more Chinese and Russian financial institutes and enterprises are using local currencies to invest and settle accounts, as the yuan-ruble trade platform is becoming more established and the transaction network is expanding amid deepening China-Russia economic and financial cooperation.

goodbye dollar, hello renminbi

The yuan clearing bank in Moscow will greatly accelerate trade in local currencies:

Industrial and Commercial Bank of China (ICBC) officially started operating as a Chinese renminbi (CNY) clearing bank in Russia Wednesday, a move set to facilitate the use of the currency and cooperation in various fields between the two countries.

“Under the guidance of the governments and central banks of both countries, ICBC’s Moscow branch will effectively fulfill its responsibility and obligation as a renminbi clearing bank by taking further advantage of its leading edge in renminbi businesses, providing customers with safe, high quality and convenient clearing services,” said Hu Hao, ICBC’s deputy governor, at the opening ceremony.

“Financial regulatory authorities of China and Russia have signed a series of major agreements, which marks a new level of financial cooperation,” said Dmitry Skobelkin, deputy governor of the Central Bank of the Russian Federation.

“The launching of renminbi clearing services in Russia will further expand local settlement business and promote financial cooperation between the two countries,” the official added.

With the continuous deepening of the Russia-China comprehensive strategic partnership of coordination in recent years, the two countries are now starting to enhance local currency cooperation.

At the end of 2015, the Russian central bank announced the inclusion of the renminbi in its national foreign exchange reserves, making it Russia’s officially recognized reserve currency.

During Russian President Vladimir Putin‘s visit to China in June last year, the central banks of the two countries signed a memorandum of cooperation in starting renminbi clearing services in Russia, just three months before ICBC’s Moscow branch was appointed by China’s central bank as the clearing house for settling renminbi transactions there.

It’s no secret that Russia and China have employed a number of methods to slowly wean themselves off dollar dependency.

Russia became China’s largest energy exporter in February of last year after it agreed to accept payment in yuan.

The dollar is slowly losing its privileged place in international transactions.

We’re sure Washington is less than thrilled.

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Walking a tightrope: China manoeuvres between Saudi Arabia and Iran


President Xi Jinping and King Salman

By James M. Dorsey

This week’s imposition of sanctions on one of China’s largest telecom equipment manufacturers, ZTE, by the US Commerce Department, and an investigation of Huawei, ZTE’s foremost Chinese competitor, could not have come at a more auspicious moment for Saudi King Salman as he visits China on the third leg of his month-long Asian tour.

Fishing in murky waters

King Salman’s visit aims to strengthen economic and military ties and persuade China that Saudi Arabia rather than Iran is its most useful regional ally. The penalties and investigation of the two Chinese companies related to violations of US sanctions on Iran and North Korea signal the Trump administration’s intent to adopt a tough stance toward the Islamic republic. ZTE pleaded guilty to the US accusation that it sold US-made electronics to Iran and agreed to pay a $1.19 billion fine.

“We are putting the world on notice: The games are over. Those who flout our economic sanctions and export control laws will not go unpunished – they will suffer the harshest of consequences,” said US Commerce Secretary Wilbur L. Ross.

Speaking days before King Salman’s arrival in Beijing and immediately after the imposition of sanctions on ZTE, Chinese Foreign Minister Wang Yi positioned his country as a friend of both Saudi Arabia and Iran. Mr Wang urged the countries to “resolve the problems that exist between them through friendly consultations” between equals and offered to play a mediating role.

There is little prospect for successful mediation with Saudi Arabia and Iran, given the zero-sum nature of their global rivalry and the kingdom’s hope that a tougher US policy towards Iran will extend its window of opportunity in what is fundamentally an uphill battle against the Islamic republic. The imposition of sanctions on ZTE sends China a message that the US does not endorse business as usual with Iran and that this could have consequences for future US-China trade negotiations.

King Salman’s quest is further enhanced by the fact that China, which has close, long-standing military ties to Iran, last year agreed to upgrade cooperation with the kingdom. “China is willing to push military relations with Saudi Arabia to a new level,” Chinese Defence Minister Chang Wanquan told his visiting Saudi counterpart, Deputy Crown Prince Muhammad bin Salman last August. Special counter-terrorism forces from the two countries held the first ever joint exercise between the Chinese military and an Arab armed force two months later.

Closer military relations and Saudi hopes that US sanctions will complicate Chinese engagement with Iran counter perceptions that Chinese President Xi Jinping was tilting towards the Islamic republic when he visited the Middle East in early 2016.

Iran’s strategic advantage

King Salman hopes to exploit this window of opportunity while in Beijing in what is fundamentally an unequal battle with Iran that brings assets to the table that Saudi Arabia lacks. Those assets, no matter how degraded, include a large population, an industrial base, resources, a battle-hardened military, a deep-rooted culture, a history of empire and a geography that makes it a crossroads. Saudi custodianship of the Muslim holy cities, Mecca and Medina, and money will in the medium and long term not be able to compete.

Iran’s strategic advantage is nowhere more evident than in global competition to shape the future architecture of Eurasia’s energy landscape. Energy scholar Micha’el Tanchum argues that Iran is pivotal to the success of China’s trans-continental, infrastructure-focused One Belt, One Road initiative in ways that Saudi Arabia is not.

In a study published in 2015, Mr Tanchum suggested that it would be gas supplies from Iran and Turkmenistan, two Caspian Sea states, rather than Saudi oil that would determine which way the future Eurasian energy architecture tilts: China, the world’s third largest liquid natural gas (LNG) importer, or Europe. The ability of Iran to capitalise on the fact that it boasts the world’s second largest natural gas reserves and its fourth largest oil reserves was significantly enhanced with the lifting in 2015 of international sanctions.

Liquid Natural Gas importers

Liquid Natural Gas importers

According to Mr Tanchum:

Iran, within five years, will likely have 24.6 billion cubic metres of natural gas available for annual piped gas exports beyond its current supply commitments. Not enough to supply all major markets, Tehran will face a crucial geopolitical choice for the destination of its piped exports. Iran will be able to export piped gas to two of the following three markets: European Union (EU)/Turkey via the Southern Gas Corridor centring on the Trans-Anatolian Natural Gas Pipeline (TANAP), India via an Iran-Oman-India pipeline, or China via either Turkmenistan or Pakistan. The degree to which the system of energy relationships in Eurasia will be more oriented toward the European Union or China will depend on the extent to which each secures Caspian piped gas exports through pipeline infrastructure directed to its respective markets.

In other words, Mr Tanchum argued that to determine the balance of power in Eurasian energy and establish One Belt, One Road as the key determinant of Eurasia’s energy architecture, China would need to position itself as the main recipient of Iranian and Turkmen gas. That, in turn, would enhance China’s growing economic influence in Central Asia, and further extend it to the Caucasus and the eastern Mediterranean.

China has already many of the building blocks needed to make that a reality: close and long-standing relations with Iran, significant investment in Turkmen gas production and pipeline infrastructure, and the construction of Pakistan’s section of the Iran-Pakistan pipeline. Hooking the pipeline to One Belt, One Road would allow China to receive Iranian gas not only by sea on its eastern seaboard but also in its land-locked, troubled north-western province of Xinjiang.

Pakistan’s top military commander, General Qamar Javed Bajwa, appeared to acknowledge Iran’s pivotal role by noting that “enhanced Pakistan-Iran military-to-military cooperation will have a positive impact on regional peace and stability”. Pakistan, which hosts One Belt, One Road’s flagship project, the $51 billion China Pakistan Economic Corridor (CPEC), has refrained from fully engaging with a 41-nation, Saudi-led military alliance perceived to be partly directed at Iran, while the Pakistani parliament rejected a Saudi request for military support in its war in Yemen.

Linking the Iran-Pakistan pipeline to CPEC would increase Iran’s importance for the success of China’s Eurasian infrastructure play. Iran’s geopolitical strengths are, however, not wholly dependent on aligning the Islamic republic with China. With the development of Iran’s Indian-built Chabahar port and the undersea Iran-Oman-India pipeline that would potentially create an alternative Asia-to-Europe energy corridor, Iran is, according to Mr Tanchum, well-positioned to play both ends against the middle as well as adopt a key role in the trans-Atlantic community’s effort to strengthen relations with India as an anti-dote to the rise of China.

Iranian bargaining power

Iran’s geopolitical significance is further enhanced by the fact that competition for Iranian gas favour occurs against the backdrop of expectations that Iranian cooperation with Russia in Syria and elsewhere is opportunistic and unlikely to prove sustainable. Iranian-Russian competition is already visible in the Caucasus and Central Asia that ironically mitigates in Europe’s rather than China’s favour. Iran is likely to deepen energy cooperation with Turkey in a bid to enhance its influence and curtail Russian inroads in the Islamic republic’s northern neighbours, Azerbaijan, Turkmenistan, China’s principle gas supplier, and Armenia where Russia’s state-owned Gazprom has invested in an Iran-Armenia gas pipeline.

For now, King Salman’s mission in Beijing is facilitated by the fact that Mr Trump is signalling that Iran’s return to the international fold based on the nuclear agreement is not a foregone conclusion. The Saudi king may also be banking on the fact that Iranian President Hassan Rouhani could be fighting an uphill battle in presidential elections in May because the lifting of international sanctions has been slow in benefiting Iran and Iranians economically. The king’s problem, however, is that Chinese strategists are likely to see obstacles to doing business with Iran as a short-term problem and that China recognizes that in the medium and long terms Iran has assets China cannot afford to ignore.

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Dangerous Crossroads: America Threatens China


Dangerous Crossroads: America Threatens China, US Deploys THAAD Missile System in South Korea, Beijing Warns of Nuclear Arms Race


The US has begun the installation of its Terminal High Altitude Area Defence (THAAD) anti-ballistic missile system in South Korea, provoking an angry reaction from China, which warned that it could trigger a nuclear arms race in the region. The provocative move will heighten the already tense situation on the Korean Peninsula as the US and South Korea engage in huge annual war games.

Two trucks, each mounted with a THAAD launch pad, were landed aboard a C-17 cargo plane at the US military’s Osan Air Base, south of Seoul, on Monday night. According to South Korean military officials, more equipment and personnel will arrive in the coming weeks. The THAAD battery installation is likely to be completed as early as May or June.

US officials exploited North Korea’s test launch of four ballistic missiles on Monday morning as the pretext for commencing the THAAD installation. However, the final go-ahead for the THAAD deployment, which was agreed by South Korea last July, occurred last week when the South Korean government acquired the planned site in a land swap deal with the conglomerate Lotte.

Washington also insists that the THAAD placement is purely defensive and needed to counter North Korea’s nuclear arsenal. In reality, the THAAD system is offensive in character. It is an important component of an expanding US anti-ballistic missile system in Asia that is primarily aimed at preparing for nuclear war against China, not North Korea.

US imperialism, which has an estimated 4,000 nuclear warheads, has never ruled out a first nuclear strike and is spending $1 trillion to upgrade its nuclear weapons and delivery systems. Its anti-ballistic missile systems are designed to neutralise the ability of any enemy to retaliate in the event of a US nuclear attack. The Federation of American Scientists estimated that China had about 260 nuclear warheads as of 2015.

The THAAD system is designed to intercept incoming ballistic missiles at high altitude. It consists of a powerful X-band radar system to track missiles at long range, linked to truck-mounted interceptors designed to destroy a hostile missile in flight. In the event of war with China, the THAAD system would not only protect key US military bases in South Korea and Japan. Its X-band radar could detect and track missile launches deep inside the Chinese mainland.

Chinese foreign ministry spokesman Geng Shuang yesterday reiterated Beijing’s opposition to the THAAD deployment. Geng warned that China would “take necessary measures to defend our security interests and the consequences will be shouldered by the United States and South Korea.”

Russia also condemned the THAAD installation. Victor Ozerov, who chairs Russia’s Federal Defense and Security Committee, branded the deployment as “another provocation against Russia” aimed, if not at encircling Russia, “then at least to besiege it from the west and the east.”

The Chinese government has already taken retaliatory moves against South Korea, closing more than 20 stores owned by Lotte in China on the pretext of safety violations, and has advised travel agents not to sell South Korean packages to Chinese tourists. The state-owned media has suggested a wider boycott of South Korean goods and even the severing of diplomatic relations with Seoul.

A commentary in the official Xinhua news agency warned that the THAAD deployment “will bring an arms race in the region.” Hinting that China would enlarge its nuclear arsenal to counter the US anti-ballistic missile systems, it declared: “More missile shields on one side inevitably bring more nuclear missiles of the opposing side that can break through the missile shield.”

The suggestion that China could expand its nuclear arsenal only underscores the reactionary character of the Chinese regime’s response to the escalating economic and military threats by the Trump administration. The Chinese Communist Party represents the interests of an ultra-rich oligarchy, not Chinese workers and the poor. Its military build-up and whipping up of Chinese nationalism heightens the danger of war and divides the working class.

A nuclear arms race between China and the United States would be profoundly destabilising in Asia and the world. An expansion of the Chinese nuclear arsenal could prompt South Korea and Japan to develop their own nuclear weapons, and encourage India to enlarge its nuclear arsenal, exacerbating tensions throughout South Asia, particularly with Pakistan.

The Trump administration has targeted China, warning of trade war measures, threatening military action against Chinese-controlled islets in the South China Sea and suggesting it could tear up the “One China” policy that forms the bedrock of US-China relations.

Trump has repeatedly accused China of not imposing crippling sanctions on its ally North Korea to force it to abandon its nuclear weapons and missiles. The White House is currently engaged in a review of US strategy toward North Korea, details of which have been leaked to the media, including proposals for pre-emptive military strikes on North Korea and regime-change operations.

North Korea provides a convenient pretext for the US military build-up in North East Asia against China. The New York Times reported that one option under consideration is the return of tactical nuclear weapons to South Korea—adjacent not only to North Korea, but also China.

Trump has already outlined a huge expansion of the US military and has tweeted that the US has “to greatly strengthen and expand its nuclear capacity.” Moreover, the US strategy is shifting from the use of nuclear weapons as a last resort to the active consideration of a limited nuclear war.

North Korea is rapidly emerging as a dangerous global flashpoint. A small incident, either accidental or calculated, has the potential to trigger a catastrophic conflict on the Korean Peninsula that would draw in nuclear-armed powers such as China and Russia.

The only social force capable of halting the drive to world war is the international working class, through building a unified anti-war movement based on socialist principles to put an end to capitalism and its outmoded nation-state system, which is the source of war.

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China and Trumpism: The Political Contradictions of Global Capitalism

  • Combination of photos showing Chinese newspaper, stacked 100 yuan banknotes and US$100 bills.
    Combination of photos showing Chinese newspaper, stacked 100 yuan banknotes and US$100 bills. | Photo: Reuters / teleSUR
As U.S. hegemony declines and Chinese hegemony possibly rises, it is clear that the political scaffolding of world capitalism is hopelessly outdated.

When China’s richest man, Wang Jianlin, warned last December that a U.S. trade war against China would result in disaster for the United States, it was no idle threat. Trump scores political points with his social base each time he rails at Beijing, yet the U.S. and the global economy would grind to a halt if it were not for China’s preponderant role in shoring up global capitalism at this moment of acute crisis.

RELATED:  Trump Backtracks on ‘One China’ Stance With Xi

The simplistic notion that Trumpism represents a return to protectionism and national trade rivalries conceals the real inner contradictions of global capitalism that are bringing the 21st-century world order to the breaking point. The system faces a structural crisis of extreme inequality and overaccumulation, as well as a political crisis of legitimacy and an ecological crisis of sustainability.

But there is another dimension to the crisis that is escalating international tensions and, depending on the turn of events, could well spark world conflagration. The disjuncture between a globalizing economy and a nation-state system of political authority threatens to undermine the system’s ability to manage the crisis and helps explain Trump’s reckless anti-China posturing.

Global Capitalism No Longer Has a Hegemonic Center

There has historically been a succession of hegemonic powers, from Spain in the 16th century, to the Netherlands in the 17th, England in the 18th and 19th, and finally the United States in the As each “hegemon” rose to dominance it organized the political institutions and economic rules of the world capitalist system. While academics now debate the decline of U.S. hegemony and the possible rise of the Chinese, what is certain is that the global economy is increasingly Sino-centered and the existing political scaffolding of world capitalism is hopelessly outdated.

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Simply put, China’s international political clout does not match its expanding economic role in the global economy. The current world political order dates to the creation in 1944 of the Bretton Woods institutions by the Western victors in World War II and includes the World Bank, the International Monetary Fund, and the United Nations System. The rich Western states also established their NATO military alliance and numerous political forums for their collective rule, among them, the Bilderberg Club and the Trilateral Commission. The United States, along with Western Europe, dominates decision-making in these institutions, while the status of the dollar as the international currency makes the U.S. Treasury the world’s central bank.

However, as globalization has brought into being a Transnational Capitalist Class (TCC) and a global production and financial system into which all nations have been integrated, the BRICS – Brazil, Russia, India, China, South Africa – and other countries in the Global South have emerged as major players in the global economy. The leading capitalist groups from these countries have joined the ranks of the emerging TCC and have acquired a stake in the stability and well-being of global capitalism. But all this has occurred within the framework of an increasingly arcane international political order.

Global capitalism is particularly dependent on China, given vast worldwide chains of subcontracting and outsourcing and the central role China plays in those chains. China provides a market for transnational corporations and until recently a sink for surplus accumulated capital, along with a vast supply of cheap labor controlled by a repressive state. China became in the past three decades the new “workshop of the world.” Moreover, China leads the way in what is a surge in outward foreign direct investment from countries in the Global South to other parts of the South and to the North. Between 1991 and 2003, China’s foreign direct investment increased tenfold and then increased 13.7 times from 2004 to 2013, from US$45 billion to US$613 billion.

The more enlightened among transnational elites have been clamoring for more effective transnational state apparatuses to resolve this disjuncture between a globalizing economy and a nation-state based system of political authority. They have been seeking transnational mechanisms of governance – such as the creation of the World Trade Organization in 1995 and the establishment of the G20 in 1999 – that would allow the global ruling class to stabilize the system in the interests of saving global capitalism from itself and from radical challenges from below.

OPINION: John Pilger: The Coming War on China

The World Economic Forum or WEF, which holds its famed annual meeting in Davos, Switzerland, has called for new forms of global corporate rule, including a proposal to remake the United Nations system into a hybrid corporate-government entity run by TNC executives in “partnership” with governments. “The weakening of multiple systems has eroded confidence at the national, regional, and global levels,” warned the call to the 2017 Davos meeting, held this past January 17-20. “In the absence of innovative and credible steps towards their renewal, the likelihood increases of a downward spiral to the global economy.”

Trump vs. Xi Jinping

While Trump was spouting his right-wing populism and protectionist threats in the run-up to his January 20 inauguration, Chinese President Xi Jinping took center stage at the January WEF conclave, delivering an inaugural speech that called for an open global economy and a new international political order. The TCC welcomed the Chinese president’s Davos debut on the world political stage and is pleased to see China take the reins of global leadership. The irony should be lost on no one that the two richest men in China, Wang Jianlin, and Jack Ma, the latter the founder of Alibaba, China’s largest e-commerce company, accompanied Xi.

RELATED: No Winner in a China-US Conflict: Chinese Foreign Minister

The U.S. and Chinese economies are inextricably interwoven. They are less autonomous national economies than two key constituent parts of an integrated global economy. Trump has accused China of manipulating its currency, threatened to levy a 45 percent tariff on certain Chinese goods, and suggested he would use the “one China” policy as a bargaining tool in trade negotiations. Yet the simple fact is the TCC in both China and the United States are dependent on their expanding economic ties.

Foreign direct investment (FDI) between the United States and China has surged over the past two decades, according to a 2016 report by two industry groups, Rhodium and the National Committee on U.S.-China Relations. In 2015, more than 1,300 U.S.-based companies had investments of $228 billion in China, while Chinese companies invested US$64 billion in the United States, up from close to zero just ten years earlier, and held US$153 billion in assets.

Notwithstanding Trump’s ranting about a U.S. trade deficit with China, Chinese exports to the United States are transnational capitalist exports. And for that matter, an overvalued Chinese currency actually benefits transnational corporations that export from China to the U.S. and the global markets. Indeed, as Trump himself has insinuated, his anti-China rhetoric and threats are aimed at creating an environment in which he can twist the Chinese state into making greater concessions to global capital (the same can be said for his anti-Mexico discourse).

Moreover, according to the U.S. Treasury, the largest foreign holder of U.S. debt is China, which owns more than US$1.24 trillion in bills, notes, and bonds or about 30 percent of the over US$4 trillion in Treasury bills, notes, and bonds held by foreign countries. In total, China owns about 10 percent of publicly held U.S. debt. In turn, deficit spending and debt-driven consumption have made the United States in recent decades the “market of last resort,” helping to stave off greater stagnation and even collapse of the global economy by absorbing Chinese and world economic output.

It was not, hence, a mere idle threat when China’s lead multibillionaire, Wang Jianlin, whose Dalian Wanda Group recently acquired the AMC cinema chain, warned the Trump regime that he would withdraw $10 billion in investments in the film and real estate industries in the United States. “ More than 20,000 employees wouldn’t have anything to eat should things be handled poorly,” he said. “The growth of English films depends on the Chinese market.”

Crisis of Global Capitalism

Trumpism encapsulates the conflicting economic and political pressures on the U.S. state. The crisis of global capitalism has become more acute in the face of economic stagnation and the rise of anti-globalization populism on both the left and the right of the political spectrum. Trumpism does not represent a break with capitalist globalization as much as a conflictive recomposition of political forces and ideological discourse as the crisis deepens and as international tensions reach new depths.

The U.S. military-security apparatus finds it difficult to adapt to new global realities and U.S. rulers rely on imperial bluster for its legitimacy among a chauvinistic base of the U.S. workers experiencing downward mobility and disaffection with the establishment elite. U.S. provocations in the South China Sea, its “Asia pivot” and anti-China bravado are escalating tensions even as they threaten to aggravate the crisis of global capitalism. A recent U.S. intelligence report warned of war between the U.S. and China, and one senior Chinese military official quoted on January 27 in the South China Morning Post warned that war with the U.S. under Trump is “not just a slogan” but threatens to become a “practical reality.”

RELATED:  China Just Made a Karl Marx Hip Hop Tune to ‘Educate’ Its Youth

What does rising Chinese global leadership mean for the global working class? The Chinese state is a capitalist state. The rise of a powerful TCC in China and of the super-rich and a high-consumption middle class alongside the rising exploitation of hundreds of millions of Chinese workers, now at the cutting edge of labor struggle worldwide, is well known. Yet Chinese capitalism has not followed the neoliberal route to global capitalist integration. The state retains a key role in the financial system, in regulating private capital, and in planning. This allows it to develop 21st-century infrastructure and to guide capital accumulation into aims broader than that of immediate profit making, something that the Western capitalist states cannot accomplish due to the rollback of public sectors, privatization, and deregulation.

A set of more balanced transnational state institutions that reflect the new realities of a multipolar and interdependent global capitalist system could de-escalate mounting international tensions and the threat of war. We should harbor no illusions that a new global political architecture can either humanize capitalism or resolve the crisis absent mass struggle for a redistribution of wealth and power downward. The return to an interventionist capitalist state around the world, however, may make more effective the demands placed on states by popular and leftist struggles from below.

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Is President Trump Headed for a War With China? All Options Are “on the Table”


By Rajan Menon, TomDispatch

President Xi Jinping of China during a summit in Washington, DC, on March 31, 2016. (Photo: Doug Mills / The New York Times)

President Xi Jinping of China during a summit in Washington, DC, on March 31, 2016. (Photo: Doug Mills / The New York Times)

Forget those “bad hombres down there” in Mexico that US troops might take out. Ignore the way National Security Adviser Michael Flynn put Iran “on notice” and the new president insisted, that, when it comes to that country, “nothing is off the table.” Instead, focus for a moment on something truly scary: the possibility that Donald Trump’s Washington might slide into an actual war with the planet’s rising superpower, China. No kidding. It could really happen.

Let’s start with silver-maned, stately Rex Tillerson, Donald Trump’s pick for secretary of state. Who could deny that the former ExxonMobil CEO has a foreign minister’s bearing? Trump reportedly chose him over neocon firebrand John Bolton partly for that reason. (Among other things, Bolton was mustachioed, something the new president apparently doesn’t care for.)  But an august persona can only do so much; it can’t offset a lack of professional diplomatic experience.

That became all-too-apparent during Tillerson’s January 11th confirmation hearing before the Senate Foreign Relations Committee. He was asked for his view on the military infrastructure China has been creating on various islands in the South China Sea, the ownership of which other Asian countries, including Taiwan, the Philippines, Vietnam, Malaysia, and Brunei claim as well. China’s actions, he replied, were “extremely worrisome,” likening them to Russia’s annexation of Ukraine’s Crimean peninsula, an infraction for which Russia was slapped with economic sanctions.

The then-secretary-of-state-designate — he’s since been confirmed, despite many negative votes — didn’t, however, stop there. Evidently, he wanted to communicate to the Chinese leadership in Beijing that the new administration was already irked beyond measure with them. So he added, “We’re going to have to send China’s leaders a clear signal: that, first, the island building stops and, second, your access to those islands is not going to be allowed.” Functionally, that fell little short of being an announcement of a future act of war, since not allowing “access” to those islands would clearly involve military moves. In what amounted to a there’s-a-new-sheriff-in-town warning, he then doubled down yet again, insisting, slightly incoherently (in the tradition of his new boss) that “the failure of a response has allowed them to just keep pushing the envelope on this.”

All right, so maybe a novice had a bad day. Maybe the secretary-of-state-to-be simply ad-libbed and misspoke… whatever. If so, you might have expected a later clarification from him or from someone on the Trump national security team anyway.

That didn’t happen; instead, that team stuck to its guns. White House Press Secretary Sean Spicer made no effort to add nuance to, let alone walk back, Tillerson’s remarks. During his first official press briefing on January 23rd, Spicer declared that the United States “is going to make sure we defend our interests there” — in the South China Sea, that is — and that “if those islands are in fact in international waters and not part of China proper, then yes, we are going to make sure that we defend international territories from being taken over by one country.”

And what of Trump’s own views on the island controversy? Never one to pass up an opportunity for hyperbole, during the presidential campaign he swore that, on those tiny islands, China was building “a military fortress the likes of which the world has not seen.” As it happened, he wasn’t speaking about, say, the forces that Hitler massed for the ill-fated Operation Barbarossa, launched in June 1941 with the aim of crushing the Red Army and the Soviet Union, or those deployed for the June 1944 Normandy landing, which sealed Nazi Germany’s fate. When applied to what China has been up to in the South China Sea, his statement fell instantly into the not-yet-named category of “alternative facts.”

Candidate Trump also let it be known that he wouldn’t allow Beijing to get away with such cheekiness on his watch. Why had the Chinese engaged in military construction on the islands? Trump had a simple answer (as he invariably does): China “has no respect for our president and no respect for our country.” The implication was evident. Things would be different once he settled into the White House and made America great again. Then — it was easy enough to conclude — China had better watch out.

Standard campaign bombast? Well, Trump hasn’t changed his tune a bit since being elected. On December 4th, using (of course!) his Twitter account, he blasted Beijing for having built “a massive military complex in the middle of the South China Sea.” And it’s safe to assume that he signed off on Spicer’s combative comments as well.

In short, his administration has already drawn a red line — but in the way a petulant child might with a crayon. During and after the campaign he made much of his determination to regain the respect he claims the US has lost in the world, notably from adversaries like China. The danger here is that, in dealing with that country, Trump could, as is typical, make it all about himself, all about “winning,” one of his most beloved words, and disaster might follow.

Whose Islands?

A military clash between Trump-led America and a China led by President Xi Jinping? Understanding how it might happen requires a brief detour to the place where it’s most likely to occur: the South China Sea. Our first task: to understand China’s position on that body of water and the islands it contains, as well as the nature of Beijing’s military projects there. So brace yourself for some necessary detail.

As Marina Tsirbas, a former diplomat now at the Australian National University’s National Security College, explains, Beijing’s written and verbal statements on the South China Sea lend themselves to two different interpretations. The Chinese government’s position boils down to something like this: “We own everything — the waters, islands and reefs, marine resources, and energy and mineral deposits — within the Nine-Dash Line.” That demarcation line, which incidentally has had ten dashes, and sometimes eleven, originally appeared in 1947 maps of the Republic of China, the Nationalist government that would soon flee to the island of Taiwan leaving the Chinese Communists in charge of the mainland. When Mao Ze Dong and his associates established the People’s Republic, they retained that Nationalist map and the demarcation line that went with it, which just happened to enclose virtually all of the South China Sea, claiming sovereign rights.

This stance — think of it as Beijing’s hard line on the subject — raises instant questions about other countries’ navigation and overflight rights through that much-used region. In essence, do they have any and, if so, will Beijing alone be the one to define what those are? And will those definitions start to change as China becomes ever more powerful? These are hardly trivial concerns, given that about $5 trillion worth of goods pass through the South China Sea annually.

Then there’s what might be called Beijing’s softer line, based on rights accorded by the legal concepts of the territorial sea and the Exclusive Economic Zone (EEZ). Under the UN Convention on the Law of the Sea (UNCLOS), which took effect in 1994 and has been signed by 167 states (including China but not the United States), a country has sovereign control within 12 nautical miles of its coast as well as of land formations in that perimeter visible at high tide. But other countries have the right of “innocent passage.” The EEZ goes further. It provides a rightful claimant control over access to fishing, as well as seabed and subsoil natural resources, within “an area beyond and adjacent to the territorial sea” extending 200 nautical miles, while ensuring other states’ freedom of passage by air and sea. UNCLOS also gives a state with an EEZ control over “the establishment and use of artificial islands, installations, and structures” within that zone — an important provision at our present moment.

What makes all of this so much more complicated is that many of the islands and reefs in the South China Sea that provide the basis for defining China’s EEZ are also claimed by other countries under the terms of UNCLOS. That, of course, immediately raises questions about the legality of Beijing’s military construction projects in that watery expanse on islands, atolls, and strips of land it’s dredging into existence, as well as its claims to seabed energy resources, fishing rights, and land reclamation rights there — to say nothing about its willingness to seize some of them by force, rival claims be damned.

Moreover, figuring out which of these two positions — hard or soft — China embraces at any moment is tricky indeed. Beijing, for instance, insists that it upholds freedom of navigation and overflight rights in the Sea, but it has also said that these rights don’t apply to warships and military aircraft. In recent years its warplanes have intercepted, and at close quarters, American military aircraft flying outside Chinese territorial waters in the same region. Similarly, in 2015, Chinese aircraft and ships followed and issued warnings to an American warship off Subi Reef in the Spratly Islands, which both China and Vietnam claim in their entirety. This past December, its Navy seized, but later returned, an underwater drone the American naval ship Bowditch had been operating near the coast of the Philippines.

There were similar incidents in 2000, 2001, 2002, 2009, 2013, and 2014. In the second of these episodes, a Chinese fighter jet collided with a US Navy EP-3 reconnaissance plane, which had a crew of 24 on board, less than 70 miles off Hainan island, forcing it to make an emergency landing in China and creating a tense standoff between Beijing and Washington. The Chinese detained the crew for 11 days. They disassembled the EP-3, returning it three months later in pieces.

Such muscle flexing in the South China Sea isn’t new. China has long been tough on its weaker neighbors in those waters. Back in 1974, for instance, its forces ejected South Vietnamese troops from parts of the Paracel/Xisha islands that Beijing claimed but did not yet control. China has also backed up its claim to the Spratly/Nansha islands (which Taiwan, Vietnam, and other regional countries reject) with air and naval patrols, tough talk, and more. In 1988, it forcibly occupied the Vietnamese-controlled Johnson Reef, securing control over the first of what would eventually become seven possessions in the Spratlys.

Vietnam has not been the only Southeast Asian country to receive such rough treatment. China and the Philippines both claim ownership of Panatag (Scarborough) Shoal/Huangyang Island, located 124 nautical miles off Luzon Island in the Philippines. In 2012, Beijing simply seized it, having already ejected Manila from Panganiban Reef (aka Mischief Reef), about 129 nautical miles from the Philippines’ Palawan Island, in . In 2016, when an international arbitration tribunal upheld Manila’s position on Mischief Reef and Scarborough Shoal, the Chinese Foreign Ministry sniffed that “the decision is invalid and has no binding force.” Chinese president Xi Jinping added for good measure that China’s claims to the South China Sea stretched back to “ancient times.”

Then there’s China’s military construction work in the area, which includes the building of full-scale artificial islands, as well as harbors, military airfields, storage facilities, and hangars reinforced to protect military aircraft. In addition, the Chinese have installed radar systems, anti-aircraft missiles, and anti-missile defense systems on some of these islands.

These, then, are the projects that the Trump administration says it will stop. But China’s conduct in the South China Sea leaves little doubt about its determination to hold onto what it has and continue its activities. The Chinese leadership has made this clear since Donald Trump’s election, and the state-run press has struck a similarly defiant note, drawing crude red lines of its own. For example, the Global Times, a nationalist newspaper, mocked Trump’s pretensions and issued a doomsday warning: “The US has no absolute power to dominate the South China Sea. Tillerson had better bone up on nuclear strategies if he wants to force a big nuclear power to withdraw from its own territories.”

Were the administration to follow its threatening talk with military action, the Global Times added ominously, “The two sides had better prepare for a military clash.” Although the Chinese leadership hasn’t been anywhere near as bombastic, top officials have made it clear that they won’t yield an inch on the South China Sea, that disputes over territories are matters for China and its neighbors to settle, and that Washington had best butt out.

True, as the acolytes of a “unipolar” world remind us, China’s military spending amounts to barely more than a quarter of Washington’s and US naval and air forces are far more advanced and lethal than their Chinese equivalents. However, although there certainly is a debate about the legal validity and historical accuracy of China’s territorial claims, given the increasingly acrimonious relationship between Washington and Beijing the more strategically salient point may be that these territories, thousands of miles from the US mainland, mean so much more to China than they do to the United States. By now, they are inextricably bound up with its national identity and pride, and with powerful historical and nationalistic memories — with, that is, a sense that, after nearly two centuries of humiliation at the hands of the West, China is now a rising global power that can no longer be pushed around.

Behind such sentiments lies steel. By buying some $30 billion in advanced Russian armaments since the early 1990s and developing the capacity to build advanced weaponry of its own, China has methodically acquired the military means, and devised a strategy, to inflict serious losses on the American navy in any clash in the South China Sea, where geography serves as its ally. Beijing may, in the end, lose a showdown there, but rest assured that it would exact a heavy price before that. What sort of “victory” would that be?

If the fighting starts, it will be tough for the presidents of either country to back down. Xi Jinping, like Trump, presents himself as a tough guy, sure to trounce his enemies at home and abroad. Retaining that image requires that he not bend when it comes to defending China’s land and honor. He faces another problem as well. Nationalism long ago sidelined Maoism in his country. As a result, were he and his colleagues to appear pusillanimous in the face of a Trumpian challenge, they would risk losing their legitimacy and potentially bringing their people onto the streets (something that can happen quickly in the age of social media). That’s a particularly forbidding thought in what is arguably the most rebellious land in the historical record. In such circumstances, the leadership’s abiding conviction that it can calibrate the public’s nationalism to serve the Communist Party’s purposes without letting it get out of hand may prove delusional.

Certainly, the Party understands the danger that runaway nationalism could pose to its authority. Its paper, the People’s Daily, condemned the “irrational patriotism” that manifested itself in social media forums and street protests after the recent international tribunal’s verdict favoring the Philippines. And that’s hardly the first time a foreign policy fracas has excited public passions. Think, for example, of the anti-Japanese demonstrations that swept the country in 2005, provoked by Japanese school textbooks that sanitized that country’s World War II-era atrocities in China. Those protests spread to many cities, and the numbers were sizeable with more than 10,000 angry demonstrators on the streets of Shanghai alone. At first, the leadership encouraged the rallies, but it got nervous as things started to spin out of control.

“We’re Going to War in the South China Sea…”

Facing off against China, President Trump could find himself in a similar predicament, having so emphasized his toughness, his determination to regain America’s lost respect and make the country great again. The bigger problem, however, will undoubtedly be his own narcissism and his obsession with winning, not to mention his inability to resist sending incendiary messages via Twitter. Just try to imagine for a moment how a president who blows his stack during a getting-to-know-you phone call with the prime minister of Australia, a close ally, is likely to conduct himself in a confrontation with a country he’s labeled a prime adversary.

In the event of a military crisis between China and the United States, neither side may want an escalation, to say nothing of a nuclear war. Yet Trump’s threats to impose 45% tariffs on Chinese exports to the US and his repeated condemnation of China as a “currency manipulator” and stealer of American jobs have already produced a poisonous atmosphere between the world’s two most powerful countries. And it was made worse by his December phone conversation with Taiwan’s president, Tsai Ing-wen, which created doubts about his commitment to the One China policy the United States has adhered to since 1972. The Chinese authorities apparently made it clear to the White House that there couldn’t even be a first-time phone call to Xi unless the new president agreed to stick with that policy. During a conversation with the Chinese president on February 9th, Trump reportedly provided that essential assurance. Given the new American president’s volatility, however, Beijing will be playing close attention to his words and actions, even his symbolic ones, related to Taiwan.

Sooner or later, if Trump doesn’t also dial down the rest of his rhetoric on China, its leaders will surely ratchet up theirs, thereby aggravating the situation further. So far, they’ve restrained themselves in order to figure Trump out — not an easy task even for Americans — and in hopes that his present way of dealing with the world might be replaced with something more conventional and recognizable. Hope, as they say, springs eternal, but as of now, in repeatedly insisting that China must do as he says, Trump and his surrogates have inserted themselves and the country into a complicated territorial dispute far from America’s shores. The hubris of Washington acting as the keeper of world order, but regularly breaking the rules as it wishes, whether by invading Iraq in 2003 or making open use of torture and a global network of secret prisons, is an aspect of American behavior long obvious to foreign powers. It looks to be the essence of Trumpism, too, even if its roots are old indeed.

Don’t dismiss the importance of heated exchanges between Washington and Beijing in the wake of Trump’s election. The political atmosphere between rival powers, especially those with massive arsenals, can matter a great deal when they face off in a crisis. Pernicious stereotypes and mutual mistrust only increase the odds that crucial information will be misinterpreted in the heat of the moment because of entrenched beliefs that are immune to contrary evidence, misperceptions, worst-case calculations, and up-the-ante reactions. In academic jargon, these constitute the ingredients for a classic conflict spiral. In such a situation, events take control of leaders, producing outcomes that none of them sought. Not for nothing during the Cuban Missile Crisis of 1962 did President John Kennedy look to Barbara Tuchman’s book, Guns of August — a gripping account of how Europe slipped and slid into a disastrous world war in 1914.

There has been lots of anxiety about the malign effects that Donald Trump’s temperament and beliefs could have domestically, and for good reason. But in domestic politics, institutions and laws, civic organizations, the press, and public protests can serve, however imperfectly, as countervailing forces. In international politics, crises can erupt suddenly and unfold rapidly — and the checks on rash behavior by American presidents are much weaker. They have considerable leeway to use military force (having repeatedly circumvented the War Powers Act). They can manipulate public opinion from the Bully Pulpit and shape the flow of information. (Think back to the Iraq war.) Congress typically rallies reflexively around the flag during international crises. In such moments, citizens’ criticism or mass protest invites charges of disloyalty.

This is why the brewing conflict in the South China Sea and rising animosities on both sides could produce something resembling a Cuban-Missile-Crisis-style situation — with the United States lacking the geographical advantage this time around. If you think that a war between China and the United States couldn’t possibly happen, you might have a point in ordinary times, which these distinctly aren’t.

Take the latest news on Stephen Bannon, formerly the executive chairman of the alt-right publication Breitbart News and now President Trump’s chief political strategist. He has even been granted the right to sit in on every meeting of the National Security Council and its Principals Committee, the highest inter-agency forum for day-to-day national security deliberations. He will be privy to meetings that, according to a directive signed by Trump, even the chairman of the Joint Chiefs of Staff and the director of national intelligence may not join unless “issues pertaining to their responsibilities and expertise will be discussed.” Calling this a break with past practice would be an understatement of the first order.

So Bannon’s views, once of interest only to a fringe group of Americans, now matter greatly. Here’s what he said last March about China in a radio interview: “We’re going to war in the South China Sea in five to 10 years, aren’t we? There’s no doubt about that. They’re taking their sandbars and making basically stationary aircraft carriers and putting missiles on those. They come here to the United States in front of our face — and you understand how important face is — and say it’s an ancient territorial sea.”

Think of this as Bannon’s version of apocalyptic prophecy. Then consider the volatility of the new president he advises. Then focus on the larger message: these are not ordinary times. Most Americans probably don’t even know that there is a South China Sea. Count on one thing, though: they will soon.

Posted in USA, ChinaComments Off on Is President Trump Headed for a War With China? All Options Are “on the Table”

Will Washington’s New Pro-Moscow, Anti-Beijing Gang Drive a Wedge Through the BRICS in 2017?


The weeks following an underwhelming Brazil-Russia-India-China-South Africa (BRICS) mid-September summit in Goa and the United States presidential election in November have unveiled ever-widening contradictions.

Thanks to blatant corruption, presidential delegitimation has reached unprecedented levels in both Brazil and South Africa; while ruling-party religious degeneracy in India also included an extraordinary bout of local currency mismanagement; and sudden new foreign-policy divergences may wreak havoc in China and Russia.

The BRICS bloc’s relations could well destabilize to the breaking point.

Washington Wedge

Even before the next major world recession arrives, probably within two years, the inexorable rise of intra-bloc conflict will be apparent at the September 2017 BRICS summit in Xiamen, China. Most obviously, the Brasilia, Moscow and New Delhi regimes are shifting toward Washington while those in Pretoria and Beijing are spouting well-worn anti-imperialist rhetoric, just as Donald Trump and his unhappy mix of populists, paleo-conservatives, neo-conservatives and neoliberals take power on January 20.

We should have been more concerned about these power relations much earlier. For more than a decade, Washington militarists and their academic allies (like Keir Lieber and Daryl Press) have believed that “the United States now stands on the cusp of nuclear primacy… [having] the ability to disarm the nuclear arsenals of Russia or China with a nuclear first strike.” Such men are further empowered by Trump’s Christmas-time threat to any opponent that he would engage in “an arms race. We will outmatch them at every pass and outlast them all.”

Obama Legacy

In spite of regular promises to disarm the nukes, outgoing president Barack Obama’s recent recommitment to a new generation of precision-guided mini-warheads will not only cost more than $1-trillion over the next three decades, but also makes their use “more thinkable,” according to one of his top strategists.

And in several other ways Obama’s legacy set the stage for the worst of Trump’s coming policies: economically empowering the top 1% at the expense of the vast majority, continuation of a belligerent foreign policy, promotion of corporate interests across the world, denial of civil liberties especially to refugees and prisoners, and construction of a vast surveillance capacity by Washington’s deep state.

Still, while each of these dangerous elephants trample the grass underfoot, there are a few surviving blades – the subject of a coming essay. Only grassroots initiatives offer encouragement for a bottom-up anti-imperial afterlife following the top-down imperial, inter-imperial and sub-imperial follies of 2017. The main point of the pages ahead, though, is that whether in Washington or BRICS capitals, the wedge may well work but the broader right-wing agenda will fail.

Tensions in Taiwan

To illustrate the insanity ahead, one ‘country’ seems poised to centrally play at least a symbolic role: Taiwan. In late December, Solly Msimanga – the centre-right mayor of South Africa’s capital city, Pretoria, elected just four months earlier – visited Taipei to seek out trade and investment opportunities, following an invitation from his counterpart in Taiwan’s capital.

The prior municipal political establishment became as wild-eyed-angry about this trip as were Chinese elites about the December 2 congratulatory phone call Trump happily took from Taiwan’s president Tsai Ing-Wen. Reflecting an unusual global sensibility, the African National Congress (ANC) branch that had ruled the city for the prior two decades furiously complained that Msimanga’s trip “exposed the conspiracy against BRICS countries… We are without doubt characterizing this trip as treason” (sic).

The national Department of International Relations and Cooperation spokesperson, Clayson Monyela, reiterated that Msimanga “was advised against undertaking this trip. The SA government respects the One China policy.” Actually, Monyela’s unit has its own Taipei Liaison Office which promotes cooperation in biomedicine and auto electronics. Likewise the Taiwanese have Liaison Offices in Pretoria and Cape Town.

Indeed dating to 1996 when Taiwan held its first-ever democratic presidential election, Nelson Mandela had committed to recognize a government which “supported us during the later phase of the struggle… It is not easy for me to be assisted by a country, and once I come to power, say ‘I have no relations with you’. I haven’t got that type of immorality, and I will not do it.” The ‘support’ was merely a bribe: in 1993-94, Taipei officials donated $20-million to the ANC for its election campaign, a U-turn after a long history of the pro-U.S. military regime’s collaboration with apartheid. (Mandela similarly celebrated Indonesian dictator Suharto in 1997, after receiving his taxpayers’ similarly generous donations.)

Always exhibiting his deal-making instincts, Trump had replied to critics, “I don’t know why we have to be bound by a One China policy, unless we make a deal with China having to do with other things, including trade.” (Washington had recognized One China since 1979, as had the UN General Assembly since 1971.)

One reasonable response from Taiwan was a request not to be used as a bargaining chip. Complained a “very annoyed” researcher, June Lin from the Taipei-based Formosan Association for Public Affairs, “Trump tried to be free and easy, but he is very specific about the exchange deal: ‘Who cares? Unless you give me A and B and C, or I won’t give a damn.’”

A Chinese state mouthpiece, the Global Timesthreatened that if Trump “openly abandons the One China policy, there will be a real storm. At that point, what need does mainland China have for prioritising peaceful unification with Taiwan over retaking the island by military force?”

War is one scenario but an economic blockade is more likely, given Taiwan’s reliance on China, especially sending world-leading semi-conductors to the desperately dependent West via eastern mainland China’s high-tech assembly facilities. One Beijing official told Reuters, “We can just cut them off economically. No more direct flights, no more trade. Nothing. Taiwan would not last long. There would be no need for war.”

Moreover, if Trump continued to be – as the Global Times put it – “as ignorant of diplomacy as a child,” then China would aid (unspecified) anti-U.S. forces. “This inexperienced president-elect probably has no knowledge of what he’s talking about. He has overestimated the U.S. capability of dominating the world and fails to understand the limitation of U.S. powers in the current era.”

If Trump is merely an ignorant conman, as seems the case, he nevertheless has a potent instinct for divide-and-rule rhetorical flair, confirmed by his support in the U.S. white working class. Trump’s economic localization slogan “Buy American and Hire American” may, in turn, combine with his geopolitical deal-making to become a major wedge between the BRICS. For behind the resurgent inter-imperial sentiments lie vast economic contradictions that now appear beyond the capacity of multilateral capitalist regulation to resolve.

Rightwing or Leftwing Localization?

Beijing will certainly face worsening problems with Trump, given the latter’s propensity to blame trade competition – specifically, subsidised Chinese exports and currency devaluation, as well as alleged Chinese commercial computer hacking – for U.S. deindustrialization. Advised by the notorious Sinophobe economist Peter Navarro, Trump’s answer is a series of localization-oriented policies that will allegedly benefit U.S. manufacturing industry by increasing protection from foreign imports with what may be a 45% tariff on China and 10% on goods from other overseas sources.

Centre-left economist Joseph Stiglitz warns against Trumponomics, in part because of the lack of redistribution that might make such high import tariffs feasible: “Higher interest rates will undercut construction jobs and increase the value of the dollar, leading to larger trade deficits and fewer manufacturing jobs – just the opposite of what Trump promised. Meanwhile, his tax policies will be of limited benefit to middle-class and working families – and will be more than offset by cutbacks in healthcare, education, and social programs.”

A trade war is just as likely an outcome, reminiscent of the protectionist Smoot-Hawley Act of 1930 which is credited with contributing to the Great Depression. Like that period, the major question is in which direction populist sentiments channel working-class politics, rightwards or leftwards. (A coming essay considers the left option.)

Momentum in most sites is enjoyed by right-wing leaders: the U.S. (Trump), Britain (UK Independence Party and Brexit supporters), France (National Front led by Marine le Pen), Germany (Alternative for Germany) and the Netherlands (Party of Freedom led by Geert Wilders), with the latter three holding elections in 2017, along with Italy whose Five Star Movement (led by comedian Beppe Grillo) also has right-populist support.

If this tendency continues to prevail, we can expect the widespread emergence of what is often termed a ‘fascist’ regime: when the populist sentiments of working-class people are revealed as nativist, racist, misogynist, homophobic, xenophobic, Islamophobic, anti-Semitic, ablist and anti-ecological, when imperialist and militaristic sentiments are acted upon, and when the socio-cultural agenda of the right is conjoined with corporate power to take control of the state.

In the period 2017-20, the dominant alignment appears to be a combination of far-right socio-cultural politics with mega-corporate interests, at least in the USA. (In Britain, the City of London’s financial-corporate agenda conflicts more explicitly with the far-right’s Brexit strategy.) It became clear immediately after the election that Wall Street’s giddy investors expect military, financial and fossil fuel industry stocks to prosper far more than any others, as the Dow Jones index hit a new record.

Trump promises to lower corporate taxes from 35 to 15% and rapidly inject what might be called ‘dirty Keynesian’ spending on airports and private transport infrastructure, heralding a new boom in U.S. state debt. Along with the Federal Reserve’s rise in interest rates, this in turn will at least initially draw more of the world’s liquid capital back into the U.S. economy, similar to the 2008-09 and post-2013 shifts of funds that debilitated all the BRICS currencies aside from the Chinese yuan.

New Alliances Loom as Several BRICS Continue to Crumble

With Trump’s election and the resulting rearrangement of geopolitical alliances and economic uncertainty, the BRICS will be under increasing pressure on several fronts. One winner may well be the Russian economy, as a result of loosening sanctions and the higher oil prices that will likely result from the December 2016 Organization of Petroleum Exporting Countries agreement. At rock bottom in February 2016, the price per barrel had fallen to $27, but by year’s end it was $55, giving some prospect of relief to the Russian economy.

Nevertheless, as the world becomes more geopolitically dynamic and economically dangerous – what with ongoing Chinese overcapacity, unprecedented global corporate debt while profit rates continue falling, worsening stagnation and rising financial meltdown risks emanating from weak European banks such as Germany’s Deutsche as well as several Italian banks – the political coherence of the BRICS bloc is in question.

Trump’s election heralded a period ahead in which the BRICS’ dubious claim to building a counter-hegemonic world politics will falter even faster. Two leaders – Brazil’s Michel Temer and India’s Narendra Modi – have strong ideological affinities as conservative nationalists.

Temer’s government, installed in May, has come under intense pressure because of ongoing popular delegitimation of his constitutional-coup regime, in part from unions which had supported the predecessor Workers Party. Temer’s closest allies (e.g., Renan Calheiros and Eduardo Cunha, who arranged former president Dilma Rousseff’s downfall in the Congress, and six of his cabinet ministers) were repeatedly exposed as far more corrupt than the prior president, thanks in part to plea bargain confessions by 77 officials of the Odebrecht construction companies involved in political bribery.

In December, Temer’s government imposed a new 20-year austerity regime that is certain to generate a coming period of unrest. Temer’s two 2016 trips to Asia – to appear with the G20 and especially with other BRICS leaders at the Goa summit – represent one means of distraction from such troubles.

In India, six weeks before hosting the 2016 summit, Modi suffered a strike of an estimated 180 million workers demanding both higher wages and an end to his neoliberal (austerity-oriented, pro-corporate) economic policies. Although his Hindu nationalism assures a strong base, Modi soon became even more unpopular with the non-sectarian working class and poor (amongst others) due to his chaotic banning of large currency notes (500 and 1000 rupees) that make up 86% of the money in circulation. This left many rural areas virtually without cash and hence without economic activity, and banks were compelled to restrict funds withdrawals to small daily amounts.

Modi also attempted, albeit unsuccessfully, to use the Goa summit for intense (albeit unsuccessful) ‘anti-terrorist’ lobbying. The economic and political links that China and Russia have built with the Pakistani government – as it has progressively delinked from Washington in the wake of the 2011 Osama bin Laden execution – remain more attractive than remaining in India’s favour within the South Asian rivalry.

A third leader, South Africa’s Jacob Zuma, seems to require BRICS anti-imperialist myth-making to shore up his internal legitimation, as part of the ANC’s so-called “talk left, walk right“ tendency. For example, in November 2016 Zuma explained BRICS to party activists in the provincial city of Pietermaritzburg: “It is a small group but very powerful. [The West] did not like BRICS. China is going to be number one economy leader… [Western countries] want to dismantle this BRICS. We have had seven votes of no confidence in South Africa. In Brazil, the president was removed.”

The following week in Parliament, Zuma was asked by an opposition Member of Parliament which countries he meant, and he replied, “I’ve forgotten the names of these countries. How can he think I’m going to remember here? Heh heh heh heh!,” he chuckled.

It is evident that Zuma will continue to use the BRICS as a foil for such defensive sentiments, even though his government’s initial endorsement of the NATO bombing of Libya in 2011 was the most egregious case of the BRICS’ geopolitical role in Africa, against the African Union’s wishes (and to be fair, Pretoria did reverse course and opposed further intervention). Behind the scenes, U.S. journalist Nick Turse has identified the Pentagon’s “war fighting combatant command” in dozens of African states, mainly directing local proxies.

It soon transpired that there was a blunt division of labour at work between Washington and its deputy sheriff in Pretoria. At the conclusion of his 2014 meeting with Obama as part of a U.S.-Africa heads-of-state summit, Zuma identified a chilling conclusion: “There had been a good relationship already between Africa and the U.S. but this summit has reshaped it and has taken it to another level… We secured a buy-in from the U.S. for Africa’s peace and security initiatives… As President Obama said, the boots must be African.”

The theatrical aspects of BRICS will continue, apparently designed in part for the local consumption of constituencies who want to see their leaders standing tall internationally in part because of rising local problems. But the most dynamic and contradictory terrain of BRICS to consider is their role in global geopolitics.

BRICS Play the Global Game

Armed conflicts and extreme tensions certainly affect the BRICS directly and in their immediate regions: Syria, Ukraine, Poland, Pakistan, the Korean Peninsula and the South China Sea. In addition, global power balances are adjusting because of dramatic 2016 shifts of leadership loyalties from West to East in Turkey and the Philippines encouraged by Russia and China, respectively.

Meanwhile, the last two years have witnessed major armed (including civil) conflicts continuing in Syria, Afghanistan, Turkey, Pakistan, Mexico and northern and central Africa. Aside from extremist groups such as the Islamic State, Boko Haram and Al-Shabaab, the main belligerent bloc of states catalysing violence in the world today is centred on Washington.

World military spending, 2015. [Source: Bank of America.]

The most dangerous such state network continues to feature Israel, Saudi Arabia and Qatar in the Middle East (the latter two of which split favours in funding both Islamic extremists and the Clinton Foundation). Misery, displacement, refugees and brutal repression are evident, as a result, from Palestine to Syria to Yemen, while the Pentagon and State Department are themselves directly responsible for infinitely destructive chaos in Libya, Afghanistan and Iraq. Vladimir Putin’s decision to defend Syria’s corrupt, dictatorial Bashar al-Assad regime in turn led to extensive war crimes against civilians such as bombing East Aleppo.

Beyond the Middle East, it is always tempting for Western powers to provoke incursions in the BRICS’ regional sites of accumulation and geopolitical influence. The North Atlantic Treaty Organization’s (NATO) conflicts with Russia in Georgia, the Ukraine, Poland, Syria and Turkey, and the U.S. Navy with China in the South China Sea, have been most important in recent years. The U.S. dominates world military spending, with $610-billion in direct outlays in 2014 (and myriad other related expenses maintaining Washington’s control such as U.S. AID). But four of the five BRICS also spent vast amounts on arms: $385-billion in 2015 (of which 55% was China).

There are various other sites of contestation, e.g. over Washington’s (and its ‘five eyes’ allies’) capacity to tap communications and computers through the internet. After revealing the U.S. National Security Agency’s (NSA) snooping capacity in 2013, whistle-blower Edward Snowden has an apparently safe Moscow exile, after fears of extradition to the U.S. or worse. A few months later, Rousseff cancelled the first visit by a Brazilian head of state to Washington in 40 years, as a way to protest Snowden’s revelation that the NSA was tapping her phone.

In this context of split loyalties, two quite unpredictable processes are in play at the time of writing, centering on Russian and Chinese relations with Washington. First, in Russia, Putin was accused by Obama and by the defeated candidate Hillary Clinton of assisting Trump to win the November 2016 election through email hacking, a matter that may be clarified in January if U.S. intelligence agencies manage to prove the case. But these agencies failed repeatedly on prior occasions, and on December 29 even Obama failed to offer conclusive evidenceof wrongdoing when he expelled three dozen Russian diplomats accused of spying.

At the time of writing, WikiLeaks founder Julian Assange still denied he had access to leaked emails from any direct Russian source. A former British ambassador, Craig Murray, claims mid-2016 Democratic National Committee leaks were given to him by an internal Democratic Party whistle-blower, to pass to Assange. Another election email scandal involved the hacking of Clinton’s campaign chairperson, John Podesta, whose security advisor admitted that he accidentally made Podesta vulnerable in a phishing scam designed to acquire his password.

Putin responded to Obama’s late-2016 attacks merely with scorn, saying he would await the presidential transition, and was immediately congratulated by Trump. Putin not only recently bragged, “Of course the U.S. has more missiles, submarines and aircraft carriers, but what we say is that we are stronger than any aggressor, and this is the case.”

Yet Putin’s critics remind that the Russian government is being successfully prosecuted for widespread doping of Olympic athletes, a charge once denied but now confessed. Given Putin’s hatred of the U.S. State Department – for valid reasons, such as its role in the Ukrainian regime change in 2014 and destruction of Iraq, Afghanistan, Libya and Yemen in recent years – there is no question that he both favoured the election of Trump and had the spy-craft capacity to make an intervention.

Putin also enjoys alliances with several far-rightwing allies in Europe and he anticipates a dramatic adjustment in the Western balance of forces thanks in part to Trump’s prolific personal business interlocks with Russia. Benefits to Putin will begin with the relaxation of sanctions associated with Russia’s 2014 invasion of the Ukrainian (former Soviet) province of Crimea, recognition of Moscow’s sphere of influence in the ex-Soviet Union, and potentially also a rising oil price.

One dilemma for the Trump administration is that his own party and the Democratic Party have been conditioned to despise Putin for more than a decade. But Trump surprised the establishment with the appointment to the position of Secretary of State of the pro-Russian ExxonMobil chief executive Rex Tillerson. There could be a resurrected $500 dollar Siberian oil deal for ExxonMobil – whose implementation was interrupted in 2015 – if Washington soon ends U.S. sanctions against Russia, as is widely anticipated.

As Guardian columnist Julian Borger reports, powerful critics believe Trump’s “opaque ties with Russia and his glaring conflicts of interest represent existential threats to U.S. democracy. Trump is giving the nod to Tillerson, the recipient of Moscow’s Order of Friendship, as a slaughter is underway in Aleppo, likely to be one of the worst war crimes of the century so far, in which Russia is complicit.”

Moscow’s Sputnik news expects mediation by Henry Kissinger to mutual advantage. But this is dangerous, warns former Reagan Administration official Paul Craig Roberts: “Kissinger, who was my colleague at the Center for Strategic and International studies for a dozen years, is aware of the pro-American elites inside Russia, and he is at work creating for them a ‘China threat’ that they can use in their effort to lead Russia into the arms of the West. If this effort is successful, Russia’s sovereignty will be eroded exactly as has the sovereignty of every other country allied with the USA.”

Already before Trump enters the White House, Beijing’s Xi Jinping is in greater conflict with Washington than at any time since China-U.S. frictions of the early-2000s. On the other hand, U.S. capital is extremely exposed in China through direct investment, supplier relations, R&D contracts and consumer markets. And Beijing still owns more than $1.3-trillion in Treasury Bills, although that holding has not increased since 2012.

Geopolitical tensions in the South China Sea began rising in 2011 with Obama’s “pivot to Asia.” This meant, according to journalist John Pilger, “that almost two-thirds of U.S. naval forces would be transferred to Asia and the Pacific by 2020. Today, more than 400 American military bases encircle China with missiles, bombers, warships and, above all, nuclear weapons. From Australia north through the Pacific to Japan, Korea and across Eurasia to Afghanistan and India, the bases form, says one U.S. strategist, ‘the perfect noose’.”

In addition, Eurasia is a testing ground because of increasing investments in Chinese infrastructure (perhaps amounting to $160-billion) in the former Silk Road – now ‘One Belt, One Road’ – to be funded by the new Asian Infrastructure Investment Bank (AIIB), centering on Russian-Chinese energy cooperation.

One Belt, One Road

Still, this picture of the BRICS and U.S. imperialism remains fuzzy given Trump’s mercurial character, ruthless pragmatism, exceptionally thin skin, crude bullying behaviour and ability to polarise his own society and the world. Obama’s last moves as president include a few attempts to at least briefly Trump-proof his legacy: demonising Russia, banning oil drilling and opening new environmental reserves in vulnerable sites, condemning Israel’s West Bank colonization, and protecting Planned Parenthood abortion facilities.

There is no question, though, that Trump’s most extreme threats to global geopolitics, economics, society and environment will be carried out by a Cabinet and lieutenants who represent the most regressive characteristics of U.S. capitalism. Trump’s top layer of government can be termed ‘4G’, as it contains:

  • gazillionaires – his Cabinet is worth $15-billion, by far the most tycoon-infested in U.S. history, including a top labour official opposed to a living wage;
  • generals – three veterans of the failed campaigns of Iraq and Afghanistan hold key security roles that had once been reserved for civilians;
  • gas-guzzlers – four lead officials in climate-related portfolios including the Secretary of State are loyal representatives of the oil, gas, coal and pipeline industries; and
  • GoldmanSachs – Trump’s Treasury Secretary, main economic advisor and lead political counsel were once executives of the Wall Street investment bank, responsible for so much global economic damage over the past decade due to predatory financing practices.

Must there be either an inter-imperialist conflict of elites that could lead to nuclear confrontation, debilitating trade wars or further juvenile insults as passions continue to rise on the one hand; or on the other, a new alliance of U.S. and Russian elites that will codify a lucrative intra-imperial division of the world’s spoils including fossil-fuel exploitation and resulting climate change that will quickly spiral beyond repair?

The False Hope of BRICS Top-Down Resistance

One other option is a rational approach from the BRICS countries’ leaders. Reflecting how difficult this will be, however, former South African president Thabo Mbeki expressed Africa’s desire for a reformed United Nations when speaking directly to Putin in Finland last October: “The matter of the reform of the Security Council becomes important in that respect… It needs changing. It’s difficult. Russia is a permanent member that might be one of the obstacles to changing it, I don’t know.”

Neither Moscow nor Beijing will nominate Brazil, India and South Africa for permanent seats (along with Japan and Germany), for fear of diluting their own Security Council power and especially their veto. The lack of space for Africa in the UN may mean, according to threatsmade by Zimbabwean president Robert Mugabe in September, a formal boycott of the body by the continent starting in September 2017. And another vehicle for Third World advocacy, the Non-Aligned Movement, was considered increasingly irrelevant when in September 2016 Modi did not even show up at a Caracas summit, notwithstanding India’s formative role in its 1955 founding at Bandung.

Likewise, the BRICS leaders’ self-interest prevents genuine transformation of other multilateral institutions: in the last round of ‘reforms’ of the World Trade Organization (WTO), International Monetary Fund (IMF) and UN Framework Convention on Climate Change – all consummated in December 2015 – there can be no question that Africa was the loser, as the BRICS’ neoliberal negotiators ran roughshod over the poorest countries.

Moreover, last August, the BRICS’ representatives at the Bretton Woods Institutions endorsed five-year contract extensions for World Bank and IMF leaders Jim Yong Kim (from the U.S.) and Christine Lagarde (from France). They even confirmed Lagarde’s reign in mid-December the same day a Paris court found her guilty of criminal negligence when, serving as the French finance minister, she made a huge taxpayer payout to a tycoon who in 2007 had given financial support to her Conservative Party.

And hope for the BRICS Contingent Reserve Arrangement to serve as an emergency funding alternative to the IMF remains foiled by the provision that after borrowing 30% of the quota, a desperate debtor country must then get an IMF structural adjustment policy. And the BRICS New Development Bank’s potential role as an alternative to the World Bank appeared self-sabotaged last September when a cozypartnership was agreed that entails project co-financing and staff secondments.

In 2014, Obama agreed with The Economist editor interviewing him about “the key issue, whether China ends up inside that [multilateral financial] system or challenging it. That’s the really big issue of our times, I think.” He replied, “It is. And I think it’s important for the United States and Europe to continue to welcome China as a full partner in these international norms.”

The philosophy of subordinated incorporation – sub-imperialism for short – became too difficult for Obama himself to sustain, when in 2015 he dogmatically (and unsuccessfully) discouraged AIIB membership by fellow Western powers and the Bretton Woods Institutions. It was his most humiliating international defeat. But when it came to intensified trade liberalization in the WTO, recapitalization of the IMF under neoliberal rule, and destruction of the binding emissions reductions targets on Western powers that characterized the Kyoto Protocol, Obama’s strategy of bringing China and the other BRICS inside was much more successful.

In sum, looked at from above, the BRICS leaders regularly suffer status quo assimilation when it comes to global governance partnership, but they fracture when it comes to their own internecine competition or when failing to offer unified challenges to multilateral institutional leadership. And this inconsistency is what leaves the bloc wide open to a potential Trump wedge in 2017.

With this in mind, Immanuel Wallerstein argues that Trump “is using the Nixon technique in reverse. Nixon made a deal with China in order to weaken Russia. Trump is making a deal with Russia in order to weaken China.” Wallerstein doubts its efficacy simply because Beijing and Moscow are pursuing their own separate interests effectively already: “This policy seemed to work for Nixon. Will it work for Trump? I don’t think so, because the world of 2017 is quite different from the world of 1973.”

The main difference may be the more advanced stage of economic stagnation and desperation, a topic I will take up another time. But on the left, the kinds of dashed hopes so many activists harbored at that time are also worth recalling, for they included (sometimes in partial or very contradictory ways) sustained improvements in European social democracy and the U.S. Great Society, rising Third World revolutions sometimes accompanied by Northern solidarity, the onward march of the Soviet Union and East Bloc, the Chinese “New Man,” the feminist and black power struggles, radical environmentalism, liberation of humanity from capitalist alienation and exploitation, the casting off of outmoded sexual mores and gender norms, and the end of statist domination.

Today, with the world’s progressive, democratic forces hunkering down on so many fronts, nevertheless a ripeness within so many societies’ resistance politics reflects a much broader, deeper capacity to link up than ever before: within the BRICS, the U.S. and internationally. As Pilger concludes his recent film about Washington’s latest war-mongering, “We don’t have to accept the word of those who conjure up threats and false enemies to justify the business and profit of war. We have to recognize there is another superpower, and that is us, ordinary people everywhere.” •

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China Voices Readiness to Lead World in Free Trade After US’ Pullout From TPP


China is prepared to become the top global proponent of free trade and lead the fight against protectionism, Chinese International Economic Affairs Department head Zhang Jun said Monday.

BEIJING (Sputnik) — During his presidential campaign, Trump promised to scrap the TPP during his first day in office, a pledge which has apparently been followed up. Trump has also often criticized and pledged to repeal the North American Free Trade Agreement (NAFTA) unless the agreement was renegotiated in a way that would prove more favorable to the United States. The new administration is also expected to at least delay talks on the Transatlantic Trade and Investment Partnership (TTIP).

“China is not seeking such leadership. But speaking of the situation today, it must be stressed that it was not China which surged ahead, but it was the West, which used to support openness, multilateralism and globalism, that took a step backward, leaving the space open for China… In such conditions, China will have to accept such responsibility if it must play the leading role in the fight against protectionism,” Zhang said during a briefing on Chinese leader Xi Jinping’s recent speech in Davos.

Last Tuesday, Xi’s opening speech at the World Economic Forum (WEF) in Davos took a swipe at encroaching protectionism and staunchly advocated globalization and free trade. The Chinese leader stated that no country would benefit from trade wars in an apparent dig at new US President Donald Trump, who is scrapping the Trans-Pacific Partnership (TPP), has threatened to impose higher import barriers and has accused China of manipulating its currency.In the briefing, Zhang rejected that the speech was a reaction to Trump’s statements, but acknowledged that it was relevant to the US president’s protectionist policies.

“I think that Xi Jinping did not want to start a public debated with Donald Trump by opposing protectionism, but wanted to peacefully discuss ways to jointly resolve problems in the global economy,” the diplomat said.

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China Extends Economic Influence in Balkans and Southeast Europe


China Extends Economic Influence in Balkans and Southeast Europe, Bank of China Regional Headquarters in Belgrade

Bank of China

On January 21st, 2017, the Bank of China has officially opened its regional branch headquarters in Serbian capital Belgrade, to provide banking services for cooperation in investments, trade, tourism and other fields, for countries in the region – Serbia, Rumania, Bulgaria, Greece, Albania, Macedonia, Montenegro, Bosnia and Herzegovina and others. The ceremony was held in the Government`s Palace and attended by President of the Republic Tomislav Nikolic and members of the Government.

This important development follows last June`s state visit of the President of the Republic of China Xi Jinping to Serbia and also, his talks last week with Serbian Prime Minister Aleksandar Vucic at Davos Economic Summit in Switzerland.

Establishment of the Bank of China`s regional headquarters in Belgrade, is today the main news in all major medias in Serbia and beyond. This morning I commented this event at the private regional network “TV Pink”. Among other, I noted that cooperation under OBOR, as the global initiative, is not important only for development of CEE countries, but for the whole of Europe. Through win win OBOR cooperation Europe and China are getting closer, what is equally positive form economic, cultural and political point of view, particularly now when EU is passing through serious difficulties.

Serbia`s role in the implementation of the China – CEE cooperation under OBOR is growing. Two countries are strategic partners cooperating in various fields.  In the past five years only, partners from the two countries have been constructing or modernizing roads, highways, railways, ports, bridges, tunnels, thermo-electric plant, steelwork factory, strengthening people to people exchange.  As of 1st January this year, no-visa system for citizens of the two countries came into force. A number of infrastructure projects, already implemented, or under implementation in Serbia, are highly important for modernization of connectivity in the CEE region, or in Europe.

Cooperation under CEE-OBOR has proved to be very important for Serbia`s overall economic development, modernization of industry and infrastructure and improvement of international standing.

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China’s Challenge to the World Economic Order


Now well into the second decade of the 21st century, the world is witnessing the true extent of China’s economic, political, and growing military reach. This reach and integration into the globalized world has been gradual, incremental, and quiet over the past three decades. In the shadows, China has accelerated significantly in the past 10 years. What does this mean for the established global order? This paper is a roadmap looking to join the dots on that journey.

China has experienced unprecedented success in recent years in its opposition to the Western-dominated international economic order. These successes, from the establishment of the Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank (NDB) to the rolling out of the One Belt One Road (OBOR) initiative and the internationalization of the Renminbi (RMB) are all part of a grand strategy to achieve economic hegemony.

Our key takeaways are as follows:

  • The domestic economic realignment, very much misinterpreted and still an ongoing process, will assist the country in securing internal confidence to support external aspirations.
  • The BRICS block (Brazil, Russia, India, China, and South Africa) is moving towards veto power in the IMF starting in 2017. Coupled with China’s range of economic initiatives intertwined with their OBOR and globalization strategy and the coupling of China initiated financial mechanisms towards integration of regional economies, China sits in a prime position of influence, power and patronage.
  • The sweeping changes pursued by China today are intended to contribute to the rebalancing of world economic order. They essentially seek to challenge US hegemony and bring about a Eurasian century.
  • The RMB is being positioned to overtake the USD over the next few years as China works from within and without the existing world community to establish a new economic order that it sees as more equitable than the current US-dominated order. If they are prepared, investors do not need to fear this new order.


2015 and 2016 have proven to be monumental years in China’s challenge to the global economic order. The approach taken by the sovereign differs dramatically from virtually all other post-communist economic system reform paths seen to date.

As the developing countries of the world have entered into an increasingly globalized market under the rules dictated by the post-Bretton Woods monetary institutions, such as the International Monetary Fund (IMF), the World Bank and, increasingly, the Bank of International Settlements (BIS), each has had to navigate a system composed of rules and regulations of which they had little say in the establishment and in which they enjoy limited influence at best. China stands out as arguably the most successful country at navigating this system, and its four decades of breakneck growth are evidence of this fact.

The Chinese system consists of a peculiar blend of state institutions with strong directional credit towards industry, a growing service sector composed of successful private companies, and Peoples Bank of China and other key banking institutions that remain fully state-owned. While China’s economy has liberalised in many areas, money supply, credit and bond issuance remain mostly a state affair. The Finance Ministry’s approach sheltered the country when hedge fund speculative attacks destabilized the Tiger economies in 1997, and then unexpectedly triggered a default on Russian sovereign bonds in 1998. It was the same type of crisis that previously provoked currency crises in the United Kingdom and Sweden against which the Chinese successfully defended themselves.

The United States is a key enabler of China’s unprecedented economic success, and yet also remains its greatest opponent as the Asian giant seeks to enter global markets. The rivalry is observed in US commentary on Chinese financial policy and currency valuation, what appear to be multiple ongoing ‘proxy’ energy conflicts in Africa and Washington’s outspoken resistance to Chinese participation in Bretton Woods institutions.

As always, China remains committed to a long-term strategy, and this strategy has brought the country critical successes in 2016, the significance of which are little understood outside the financial industry. Importantly, many of China’s successes within the framework of its globalization strategy are interconnected more than most realize. The choreographing of China’s strategy is culminating in what the government has termed the One Belt One Road initiative, comprising the land-based Silk Road and Belt (SREB) and the Maritime Silk Route. This initiative has tightly integrated China’s conceptual approach, whilst simultaneously underpinning the country’s all-important domestic economic realignment.

The SREB and its multiple nodes run through the continents of Asia, Europe and Africa, connecting Eurasia’s Pacific and Atlantic coastal rims via the establishment of economic trade corridors. At one end lies the developed European economic region, at the other the engine of global growth for the next half century – Asia. More specifically, the Silk Road Economic Belt focuses on economically integrating China, Central Asia, Russia and Europe (the Baltics) through trade, thus linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and the Indian Ocean. In tandem with the SREB, the 21st-Century Maritime Silk Road is designed to connect China to Europe with one lane passing through the South China Sea and Indian Ocean, and the other from China’s coast through the South China Sea to the South Pacific.

Chinese President Xi Jinping first announced the SREB concept publicly during a September 2013 visit to Kazakhstan. In a speech delivered at Nazarbayev University, Xi suggested that China and Central Asia cooperate to build a Silk Road Economic Belt. This was the first time the Chinese leadership had shared publicly its strategic vision.

The Big Picture

China’s strategic concept has, as one might anticipate, evolved and mushroomed since its 2013 announcement. The foundations of the strategy, however, remain firm. The Silk Road initiative intends to enable not only the linkages discussed above, but also China’s overarching challenge to the contemporary world order. China has laid the groundwork to achieve this goal incrementally over the last two decades. The world is currently witnessing the galvanization and culmination of those plans. This report seeks to connect the dots that have appeared over the years and explain where this strategy is ultimately heading in regard to Beijing’s game plan for achieving economic hegemony.

The following milestones illustrate just how far China has already come in its plans:

  • 2001 – China granted WTO membership
  • 2002 – Beijing initiates Go West Program to develop its Western regions
  • 2009 – RMB internationalization begins.
  • 2010 – Offshore RMB markets open in Hong Kong.
  • 2012 – Chinese companies start using RMB for trade finance.
  • 2013 – Chinese RMB trade stands at 8% of global currency trading volumes. Over RMB 270 billion in bonds are issued (Dim Sum Bonds), with RMB bank deposits reaching over RMB 100 billion in Hong Kong.
  • 2015 – The initiation of the harmonization of the financial institutions of the Shanghai Cooperation Organisation (SCO).
  • 2015 – An estimated one-third of all Chinese trade is settled in RMB. RMB became the third most traded currency in the world after EUR and USD.
  • 2017/18 – RMB to become a fully-convertible currency. Shanghai is on a clear path to becoming a truly global financial centre.

Contextualizing the path to growth – what petro-dollars’ dynamics finally meant for China

In order to comprehend China’s actions and aspirations related to the global economic system, it is important to understand the system as it currently stands, as well as how this system came into being and China’s role in the system.

China started to liberalize its economy in the 1970’s, coinciding with a crucial time in United States economic history. Much attention has been paid to the geostrategic reasons for the US engagement with China vis-a-vis the Soviet Union, but relatively few analysts acknowledge the role economic considerations played in the historical events of that period.

After the US defaulted on the gold exchange window established at the Bilderberg conference in 1971, then-Secretary of State Henry Kissinger and his team set their sights on a new petro-dollar standard. Conspiracy theories abound regarding the US government’s alleged role in orchestrating the oil supply shock of the 1970s and other catastrophes in order to strengthen the US dollar to support spending on the Vietnam War efforts. An examination of these theories falls beyond the scope of this paper. It is important to note, however, that, regardless of whether or not there is any truth to such claims, the US is widely held in non-American circles to have acted less than virtuously in creating and preserving the current economic order.

This is where China comes in. In order to realise its strategy, the US needed to increase the recycling capacity of the petro-dollar, and this required a much larger market. With the largest untapped pool of cheap labour on the planet, China was exactly what the Nixon administration was looking for. By moving low-skilled production from the US to China, multinational corporations could keep their domestic market filled with goods while greatly increasing margins and, consequently, profits.

The initial support and change by the communist regime was slow; however, Secretary of State Kissinger saw potential:

No doubt, in time, there will be profound changes in this vast social experiment, perhaps the most extensive one in human history, but there are no present indications to that effect.[1]

Kissinger’s observations could not have been more astute. The transformation of communist China from largely an agrarian economy to an autocratic capitalist state, while slow-moving at first, rapidly accelerated in the 1990’s. Small villages throughout the country transformed into megacities, and unprecedented achievements in geo-engineering, commerce and poverty reduction occurred at a rate that outside observers still struggle to grasp. However, this progress came at a cost. The export revenues from the United States came in the form of US Treasury Bonds. This remains the case today, meaning that China has exported its undervalued production in exchange for paper notes for almost four decades, while the majority of profits have remained abroad.

The build-up of Chinese foreign exchange reserves peaked in 2014 around the unprecedented USD 4 trillion mark.

Backed by an aggressive military posture, the United States’ petro-dollar standard has long given it what former French President Charles de Gaulle termed “the exorbitant privilege.”[2]The ability to recycle the Petro Dollar remains one of the top priorities of US foreign policy. Many of Washington’s most controversial foreign policy positions have been, many believe, in part motivated by an effort to preserve the USD’s world reserve currency status. Examples include US opposition to Venezuelan President Hugo Chavez’s plan to trade oil in Euros, to Iraq’s establishing trade ties directly in Euros during the lifting of the failed Oil-for-Food program in the 1990’s, and to the attempt of Muammar Gaddafi’s Libya’s to establish the Gold Dinar in the African Union.

In an email made public by Wikileaks, former Secretary of State Hillary Clinton expressly mentioned the Gold Dinar as the primary reason for invading Libya, as it had the potential to unleash strong economic development in the region. The fact that today’s Libya is a failed state drives home, in the minds of China’s leadership, the very real consequences of US realpolitik regarding the petro-dollar and the importance of China’s own financial reform strategy.

The great financial crisis, a Chinese policy reversal

It is true as it is funny. That deficits increase our money.

In understanding this there lies, the power of States to Stabilize.[3]

China suffers from the Triffin Dilemma, also known as the exorbitant privilege. One of the great ironies of exorbitant privilege is that it cannot be sustained without a permanent deficit economy. Deficits literally create money (credit) – an absolute necessity if it is the currency to be used for world trade. But a permanent deficit economy will eventually default, hyper-inflate, or both; there can be no other outcome long-term. In practice, exporting debt is the export of inflation. Once the flow of currency returns home, given the trade imbalances, the source nation has no choice but to monetize the debt or default.

The United States is no different in this regard, but this simple economic reality is poorly understood and even ignored among financial analysts. This ignorance works in the favour of policymakers, as easily accessible economic debates of such a stark reality in the public sphere could eventually spark a confidence crisis. Historical precedent shows that lack of confidence is often the ultimate tinder that induces debt default. The United States will do all in its power not to let go of its exorbitant privilege voluntarily.

The 2008 global financial crisis that started in the United States and quickly sent shook the entire world had been brewing long before the collapse of the Lehman Brothers, but then the world only became fully aware of it as equity markets collapsed and liquidity in the money markets evaporated.  China’s central bank felt pressured to respond to this alarming economic development.

In 2009, Xiaochuan Zhou, Governor of the People’s Bank of China (PBOC) issued a statement now famous among central bankers, calling for “an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit based national currencies.”[4] The reserve currency Zhou referred to is the International Monetary Fund’s Special Drawing Right (SDR).

Banking officials in China recognized that the country’s enormous domestic foreign exchange reserves faced the real risk of never being honoured. The exorbitant privilege conundrum was being laid bare, and China had to act. In order to counter this risk, Beijing has undertaken concerted efforts in multiple economic sectors to support the OBOR project and to challenge USD hegemony. These include:

  • Payment system reform
  • Multilateral development banks
  • Bilateral non-USD denominated trade agreements
  • Accumulation of gold reserves and the establishment of the Shanghai Gold Exchange
  • Positioning in the IMF and currency reform

The financial policies pursued by China, as with any country, may often differ substantially from predictions of the mainstream press. This is due, in part, to the independence of central banks which sometimes act in direct contradiction to leading government officials. The sweeping changes pursued by China today are intended to contribute to the rebalancing of world economic order. With this objective in mind, each of the five economic steps listed above aims to help bring about reforms in one of the organizations standing in the way of this global rebalancing, the IMF. They essentially seek to challenge US hegemony and bring about a Eurasian century.

A new payment system: China Unionpay & CIPS, a response to Russian sanctions

One of China’s recent accomplishments in its task of rebalancing the global economic order lies in the realm of payment system reform. In 2002, China Unionpay was established as an alternative to US-owned card payment networks such as Visa and MasterCard. Unionpay quickly grew to become the largest card payment scheme in the world, having surpassed Visa in number of issued cards in 2010. While relatively unheard of in the West until recently, the scheme has seen fast-growing acceptance worldwide, and the Unionpay logo is now seen on main street ATMs throughout the world. International coverage does not compare to the Visa/Master Card acceptance network at this stage, but this only means that there is further room for growth as banks adopt Unionpay and become network issuers within the network in their own right within their domestic markets.

Consumer payments are an important factor in payment networks but, for international banking, only one network reigns supreme. The Belgium based private network SWIFT is the spider in the web of international finance. International bank wires require a SWIFT identification number or BIC code.[5] The organization is so crucial to world finance, that sanctions issued by world government bodies like the UN are technically managed through SWIFT. The importance of this is nowhere more apparent than in the pressure the US and UK governments placed on the SWIFT organization to block Russia from using its network. Had SWIFT given into their pressure, the resulting financial crisis would have been devastating. Russian President Vladimir Putin declared that it would be akin to a declaration of war. In response to this incident, Russia began creating a domestic clearing system and a SWIFT alternative.[6]Additionally, Russia mandated domestic switching of Visa and MasterCard payments, coupled with a USD 3.8 billion security deposit as a requirement prerequisite for these two organizations’ continued operations in the Russian market.[7] Though not referred to as such, this was in practice a ransom to keep the payment networks in line  if they wished to continue to service the Russian domestic market, at least until their government’s domestic alternative was ready. Should Putin not have mandated the switch, the potential damage to Russian GDP could have been catastrophic.

Seeing what happened to Russia and understanding the possibility of such tactics being used against them at some time in the future, China’s leaders followed suit with the creation of the Cross Border Inter-bank Payments System (CIPS). CIPS is currently operational, and in 2015 it launched a trial with Russia.  Success of this network will allow China to sidestep one of the most powerful western tools to control international finance, SWIFT. CIPS and SWIFT signed a Memorandum of Understanding on 25t March 2016, with a goal of connecting CIPS to the international payments network while it is expanding.[8] As China remains the top trading partner for huge swaths of countries in the Asia-Pacific, the CIPS interbank network is aspiring to become a viable alternative for exchanging Chinese RMB in trade-related payments.

Countries with a “positive attitude towards Chinese business” are now being handsomely rewarded for their perspective. Lithuania, a small Baltic state with a population of less than 3 million, landed an agreement with China to become a hub for CIPS. It will act as a settlement centre between China and Europe. Lithuania, not famous for its international banking capabilities, obtained this reward due to the “flexible and broad attitude of Lithuanians, friendly bureaucrats and recommendations of Chinese companies investing in Klaipeda.”[9]

The importance of these above developments should not be understated. With this first phase completed, the second phase is for CIPS to be the operating window towards the Special Drawing Right issued by the IMF. The implications of this are simple – second phase completion will affect the reduction of dependency on the US economic domination with the diversification of clearing and thus trading mechanisms. At the risk of being overly simplistic it will deliver an insurance on bank clearing, an infrastructure China has not had until now. For an SDR reform to be effective in China, a customer eligible for SDR holdings is required in the form of multilateral banks.

China’s multilateral banks: AIIB and BRICS New Development Bank

On 12 March 2015, the Chancellor of the Exchequer announced the United Kingdom’s intention to become a founding member of the Asian Infrastructure and Investment Bank (AIIB).[10]The announcement was a complete surprise and in direct defiance to the US, which had been trying to kill the project from behind the scenes. This was, without question, a strategic victory for China, as UK membership provides substantial global influence. However, given the UK’s tradition to intermittently switch allies according to its self-interest in what the UK refers to as the “great game,” it should not be seen as extraordinary decision.

Despite the heavy-handed but doomed opposition by the US, the foundation was a success and, as of December 2016, 57 member nations have ratified the AOA to join the bank.[11]

The bank’s goal is to engage in “green” infrastructure and development projects, and it has not wasted any time in this regard. On 1 June 2016, the first project was approved in Indonesia, bringing the total to eight authorized projects thus far. An additional six projects are scheduled to be proposed to the board between now and next year.

As a multilateral organization, the AIIB enjoys certain aspects of immunity from nation states and operates internationally in the same manner as the World Bank, European Bank for Reconstruction and Development (EBRD) and others. Each of these forms part of a global network of supranational shareholder-based banking vehicles that hold a key stone in the next phase of global finance governance.

Some commentators propose that AIIB is a direct competitor to the IMF. However, the two organizations are actually very different. The IMF’s structure is towards payments of balance (currency support for countries running deficits), whereas AIIB runs on an infrastructure project basis.[12] There are, however, rumours from people in “the know” that the US was not even invited to participate in the AIIB as a founding member, but there is currently no way to validate this. However, if even partially true, this would imply a Machiavellian approach to the Chinese economic aspirations far beyond Beijing’s current stated goals.

The AIIB is a Chinese-led bank, and China currently holds 28.79% of the voting rights.[13] This percentage is by no means arbitrary. Voting in these types of institutions, including the IMF, is based on a simple or qualified majority, depending on the situation. Simple majority is required for most common decisions while for material votes, such as decisions regarding voting rights, capital allocation and the like, a qualified majority is required. To achieve this, 75% of all votes must be behind a proposal. With China holding 28%, it effectively holds a veto on any decision. This mirrors the position the US currently enjoys in the IMF. It is also noteworthy that 21% of the AIIB’s shares are held by non-regional members. Some of the more notable ones are the UK, Germany, Austria, Scandinavia, France, Poland and Egypt.[14]

In addition to China’s AIIB, the BRICS bloc (Brazil, Russia, India, China and South Africa) founded the New Development Bank, which is a powerful alliance between countries representing five regions that, combined, reserve 40% of the world population and a third of the world’s landmass.[15] Launched in 2014, each founding BRICS member took a subscription of 100,000 shares totalling USD 10 billion, whereof 20% is allocated to capital. The difference in share allocation between these two banks is noteworthy. The BRICS Development Bank is built on equitable balance, a rare occurrence in these types of institutions. The organization has fallen into public obscurity as Brazil has entered into recession and the news has calmed significantly in regard to its formation and potential. This bank represents, however, a challenge to the existing world governance, which former US President George H.W. Bush famously referred to as the New World Order in 1991. The lending undertaken by NDB and AIIB is pursued without conditions. The IMF refers to the conditionality dictum as austerity. The purpose, though not stated as such, is to engage nations in unsustainable debt and recover proceeds through national assets. Greece is a good example to study for more recent evidence of this modus operandi

Together, these two banks are pushing for reform of the IMF in terms of operation procedures and voting rights. Chinas message to the world could not be any more evident.

China’s growing SWAP agreement infrastructure

While China has been actively reforming its payments and banking infrastructure, it has not been idle on Swap and trade agreements. Swap agreements hold significance for China. Since Xiaochuan Zhou’s speech in 2009, the RMB has taken several steps towards internationalization. Various moves included the first pilot scheme between Hong Kong and China for cross border trade settlement. In 2010, foreign financial companies were allowed to invest the RMB surplus into the affectionately named “Dim Sum Bonds.” These, along with other steps undertaken in recent years have led many observers to wonder, whether they will eventually lead to the exchange rate floating on a basket of currencies, liberalization of the equity investment market, and more.[16] The role of the CIPS payment system for the above liberalization of the economy is obvious.

Swap agreements are an ominous sign for the USD. In practice, they are quite straight-forward. PBOC and a foreign central bank, like the ECB, enter into an agreement to freely access up to a fixed amount of respective currency.

This is significant because world trade provides a balance of payment challenge. When a company exports goods for say USD 100,000 over one year, they end up with a large USD asset on their balance sheet. Some of it is required for continued operations such as buying raw materials, energy, or outside services. However, domestically, the USD holds little function for a company so they exchange it for local currency to service salaries and operating expenses. The surplus exchanged ends up on the central bank’s balance sheet. This is what is referred to as foreign exchange reserves. So why not simply use the foreign currency domestically?

Having foreign currency commonly traded or crowding out the domestic currency would provide a direct challenge to the central bank’s sovereign power. Countries that endure this process and become dollarized, essentially end up being modern day vassal states economically subservient to and reliant upon the benevolence of foreign banks. All dollarized countries suffer immensely from economic stagnation. The USD will never hold a place for common trade in everyday activities in China. This is why it always ends up as a reserve rather than domestically stimulating economic activity.

In world trade today, the majority of contracts are denominated in USD. This is true of oil, export agreements, supply agreements, commodities, and most other economic activity. Multinationals must have access to USD in order to buy the services and goods that they need, particularly oil. However, if there is a swap agreement in place, the need for pricing in USD is limited.

When Russia and China enter into a swap agreement, foreign exchange reserves at each Central bank increase with their respective currency. Two companies engaging in cross border business are no longer required to engage in trade denominated in USD as their respective central banks guarantee clearing of the payments at a set rate, thus making the trade more efficient. Essentially, it is like a credit card where instant funding is available for trade. Note that in this scenario the USD has no place. Swap agreements are in practice an effort to decrease the USD global recycling capacity and increase the internationalization of the RMB.

The efforts have been successful. The following chart from Federal Reserve Bank of San Francisco shows the growth of the swap agreement network. [17]

Regional to International …

The Regional Comprehensive Economic Partnership (RCEP) is the South East Asian version of what most western media knows as the TPP, a free trade agreement that encompasses the world’s largest population. Though not complete at this stage, it essentially mirrors the western alternatives that provide supranational support to corporations and puts trade ahead of national borders. All current trade agreements are about transferring power to global multinationals. The efforts are led by the G20 block. Since the deal is still in progress and negotiations continue to be secret, it is better not to explore this agreement in depth.

China’s gold: pet rock or global strategy?

In 2015, the Wall Street Journal famously declared “Let’s get real about gold: It’s a pet rock.”[18]

There is no asset hated more in mainstream media today than gold and silver, also known as the precious metals. Several assassination pieces on the metal have emanated from the leading financial press over the past few years. As always, when media make concerted and collaborative efforts to promote or discredit certain events, be it fake news, the red scare, or the threat of terrorism, there is another motivating factor in the background. This is particularly true about investing. Nobody needs a crowded trade when there is a bargain in the making.

During a testimony with the Bank and Currency Committee of the House of Representatives, J. P. Morgan responded to the following question:

Q. But the basis of banking is credit, is it not?

A. Not always. That is an evidence of banking, but it is not the money itself.

Money is gold, and nothing else.[19]

There is no debate among central bankers whether gold is money or not. Gold always has been and always will be money in its purest form. It does not degrade, is sufficiently scarce, universally accepted, and is easily divisible into practical units. The foremost quality however is that it bears no counterparty risk. In financial speak, it is unencumbered. This quality ensures it will remain the ultimate insurance for wealth preservation. As such, there is not a reputable central bank in the world that does not hold the asset on its balance sheet with one notable exception – Canada.

According to the World Gold Council, China’s official reserves as of December 2016 sit at 1,842.6 metric tonnes. It is well established that this does not reflect China’s true gold holdings. The statistics for Chinese gold reserves did not update monthly until June 2016. After the great financial crisis, China’s gold holdings suddenly surged and then remained unchanged until mid-2016.[20]

Determining the true size of China’s gold wealth is speculative in nature. Jim Rickards, in his book the New Case for Gold, estimates China’s true gold holdings in the region of 4,000 metric tonnes. This is based on import statistics from Hong Kong, Chinese mine production, and similar sources. This would set China as the world’s second biggest gold holder after the United States with 8,100 metric tonnes. Bullionstar, a Singaporean bullion dealer, frequently posts research on China and its gold holdings. They estimate that the size of the Chinese gold market (not PBOC holdings) is in the region of 16,000 tonnes.[21]

However, more speculative reports suggest the true holdings to be in the region of 25,000 to 30,000 tonnes. Whatever the real number is, it is no secret that China is importing as much gold it can get a hold of while also becoming the world’s biggest gold producer. Chinese state media is encouraging gold ownership among the populace as a method to secure wealth.

The Shanghai Gold Exchange started actively trading in 2016. It has one seemingly technical detail that sets it apart from its London and New York counterparties. In order to trade on the Shanghai Gold Exchange, you need to deliver physical gold to the marketplace. This means that in order to have price discovery, you have to first acquire gold, deposit it in Shanghai, and participate. LBMA and Comex are highly leveraged paper markets where over 90% of all trades are settled in cash. The derivative contracts give the option of settling in physical trades of gold, but this rarely take place. Just like a bank, paper markets can easily suffer a run on the exchange in the same manner as the peculiar Camel market crash (Souk Al-Manakh Stock Market) in Kuwait.

With the exchanges working so differently, we should expect a divergence of pricing, also known as arbitrage. As supply is scarce in the Shanghai market compared to the paper counterparties, the price should be higher in Shanghai. If the arbitrage grows too wide, opportunists will invest on the trade, withdraw gold from Comex and LBMA, turn around and sell it on the Shanghai exchange. This would be a serious threat to western power of gold pricing. For this to happen, the arbitrage is required to be sufficiently high to cover for the actual movement of the metal.

Seeking Alpha, an established finance blog, published a piece displaying the arbitrage opportunity. It showed that on the 1st of December 2016, the Shanghai gold was trading USD 37.50 higher than London.[22]

China’s tango with the IMF

The RMB’s position as the third-most used currency and its subsequent inclusion in the IMF’s Special Drawing Rights (SDR) has shifted the balance within the existing framework, which had been in place essentially since the end of World War II. John Meynard Keynes and Harry Dexter White were the authors of the famous Bretton Woods agreement, named after the luxury hotel where the agreement was signed. Ironically, the Soviet Union never participated in the new USD Gold Standard despite being part of the negotiations. The agreement marked the terminal end of the “as good as sterling” era and provided the building blocks for the ascendance of the USA’s hegemonic period.

Keynes had envisioned a one-world currency called the Unitas but he lived before its time. Instead, the compromise of the technocratically named Special Drawing Rights (SDR) was spawned in the IMF. The SDR is a basket flat currency, synthetic in nature and issued by the IMF. The last issuance of the SDR, or world money, was in relation to the financial crisis of 2008. The SDR is not accessible to the average person, but can be mimicked by buying a composition of the currencies in the basket.

On 1 October 2016, China became a member in the global SDR currency basket. This demarks a pivotal achievement by the nation state. A few weeks later, Paul Ryan, Speaker of the US House of Representatives, entered a provision in the US budget bill on increased voting rights for China in the IMF. Outside of financial circles, the news was generally met with a yawn.

The weighting of SDR currencies prior to the inclusion of the Renminbi was as follows:

  • USD – 41.9%
  • EUR – 37.4%
  • GBP – 11.3%
  • YEN – 9.4%

And after 1 October 2016, it became:

  • USD – 41.73%
  • EUR – 30.93%
  • RMB – 10.92%
  • YEN – 8.33%
  • GBP – 8.09%[23]

The RMB is now the third-largest currency in the SDR currency basket, a pivotal achievement as envisioned by Xiaochuan Zhou in 2009. Technically, the RMB does not qualify for SDR inclusion, as it is not yet a world reserve currency, so the inclusion was clearly political. The wide sweeping reforms planned for the global economy cannot be implemented without the support of the world’s biggest export economy, China.

A qualified majority in the IMF requires support from 85% of IMF members. The United states currently hold 16.54% of voting rights and effectively a veto in the organization.

As of the 20th of December 2016, the BRICS nations hold respectively:

  • Brazil – 2.23%
  • Russia – 2.60%
  • India – 2.64%
  • China – 6.09%
  • South Africa – 0.64%

The total voting rights of the economic block represent 14.2%. Worded differently, they only need 0.8% in increased voting power in the next voting reform in order to establish a veto power as an economic block. That change is closer than most realize.[24]

The final communiqué from the 2016, the G20 summit in Hangzhou, China states:

We welcome the entry into effect of the 2010 IMF quota and governance reform and are working towards the completion of the 15th General Review of Quotas, including a new quota formula, by the 2017 Annual Meetings. We reaffirm that any realignment under the 15th review in quota shares is expected to result in increased shares for dynamic economies in line with their relative positions in the world economy, and hence likely in the share of emerging market and developing countries as a whole.[25]

An IMF technical paper, it further states:

Board of Governors Resolution 66-2 states that “Any realignment under the 15th review is expected to result in increases in the quota shares of the dynamic economies in line with their relative positions in the world economy, and hence likely in the share of emerging market and developing countries as a whole.”[26]

In other words, the BRICS bloc is moving towards veto power in the IMF in 2017.

The SDR inclusion of the Renminbi coupled with the BRICS voting block veto will structure a world order wherein which the United States must seek common ground with other trading blocs in order to enact or oppose policy.

Coupled with China’s range of economic initiatives intertwined with their OBOR and globalization strategy and the coupling of China initiated financial mechanisms to integration of regional economies, then China sits in a prime position of influence, power and patronage.

Welcome to the new world order, and China is driving

“Equitable” will be the cornerstone word guiding where world finance will travel in the next two years. The Economist boldly predicted a one world currency by 2018 in its iconic cover from 1988, “Phoenix rising.” Their penchant for mythology implies that a world financial crash, or reset, will spawn a one-world currency. Although some time off, it is difficult to imagine a new world economic order where Russia and China would not have equitable balance.

A global monetary reset is inevitably on the table; however, this paper is focused on identification of the complex shifts taking place leading to such an event, not the event itself. Christine Lagarde, the head of the IMF, spoke about this at length in one of her Bloomberg interviews from the World Economic Forum in Davos.[27] Lagarde talks about the option of a ‘structured reset,’ not one forced by macroeconomic activity. However, resets are panic-based and responsive; reforms do not hold popular support.

It is evident in both action and public statements that Russia and China are moving together towards displacing the USD as the world’s reserve currency and ending the latter’s exorbitant privilege. If the recycling of the petrodollar is finally greatly reduced, a dramatic and painful adjustment must take place in the US economy. An end to the petrodollar would mean increased inflation in the United States as trade could no longer be sustained by the endless demand for USD treasury notes. Reduced deficit spending and higher confiscation of personal wealth remain the only two options. It is a bleak future for the US consumer and corporations. The interim period as the US fights its corner is also a difficult period for developing and emerging markets. The shelves are bare of alternatives, but that is changing; new stock is arriving.

The military approach previously used by the United States to ensure USD dominance in world trade may prove costly. The China-Russia power block is simply too formidable of an enemy to secure a victory within the bounds of acceptable losses. However, it is certain that the United States will not relinquish its reserve currency power status voluntarily. Their hand will have to be forced. Consequently, we expect increased instances of staged crisis events such as the private funded democracy store fronts used to destabilize BRICS governments. We also expect agitation and multiple provocations on various fronts for China, similar to the umbrella movement in Hong Kong, the Maidan square coup in Ukraine, and recent political turmoil in South Africa. The struggle for world power is only warming up.

Lateral thinking: an abbreviated analysis of what is likely to transpire, or challenging conformity

The primary option for China and the G20 countries is a global bank regulatory framework organized around regulation from Bank of International Settlements (BIS), worldwide taxation governed by the OECD organization and the BEPS project. The game plan for the next financial crisis is the ‘Bail in plan and Stay powers’ outlined in detail in the Geneva report, the ‘Financial Stability Board’ and other world government bodies already in late stage of completion among the G20 participants. The resolution mechanism, activated on multiple occasions in Europe, will be a sombre awakening for the average saver as their pensions and savings are ‘utilized’ by the worldwide banking system.

If the SDR is to become the mechanism for a one-world currency then drastic reform would then need to be undertaken in the IMF. For now, the United States has veto power and can refuse or only accept a compromise where they retain ultimate control of the organization. Should this happen, the SDR reform will fail. Even with a US concession, the lack of an anchor (i.e. gold) in the SDR may not restore confidence in world finance in the next global reset. Should the reform be successful, the USD will be relegated to a trade currency among others, forcing a new world order with balanced trade deficits compared to runaway spending as it stands today. US President-elect Trump’s emerging confrontational strategy and position with China on trade may be the first volley in the salvo that is to come. No pun intended, but American protectionism and aggressiveness towards the looming hegemonic challenge may ‘trump’ global stability.

The consequences could be dire beyond the remit of this paper. Nevertheless, China will respond with typically Chinese characteristics. It is imperative to look at these Chinese actions through the prism of Chinese, not Western, lenses.

Trump’s canning of the TTP presents China with additional opportunities in the short-term, but it is all really about timing, the real question is how much of an opportunity does it present and how they execute that opportunity. Within the 19th Party Congress there exists the opportunity to pursue with vigour the outstanding pieces of the domestic economic realignment puzzle in China. The events of the past four years in China since Xi’s ascendency are significantly misunderstood, and massively over simplified by the West. The end game is unquestionably one of control, but the motivation for that control is perhaps what is most misunderstood in the bigger scheme of things. Like a cancer patient the country is riddled with it, but this cancer is corruption, to attain the goal of sustainability the procedures for eradication were severe, and the treatment has yet to conclude. But, it is beyond merely surviving, it is about resurgence after survival. It is about taking up your rightful place before the cancer took hold. Everything happens for a reason. With the Chinese, everything happens for multiple aligned reasons, they do not act on a singular impulsive or reactionary motive, and it is strategic thinking at its best.

What if the interconnectivity of the Chinese strategic thinking is so aligned that even events such as the massive structural reforms in the energy sector and the banking sector, which will unforgivingly kick in in 2017 are actually tied to the abovementioned milestones and mechanisms to attain their global economic positioning? How do they do this? More importantly, what is the relevance to events in the coming few months pertaining to global economic positioning and posturing? Of course they are interconnected. Their responses to US reactions to BRIC ascendency to veto position within the IMF are also interconnected.

There are several tools at China’s disposal should the US stall IMF reforms or a deal is struck that does not meet the Chinese / Russian standards of equitable reform. What if China can announce a gold denominated short-term trade bond used for world trade? This move would shock world economic markets, but can only be successful if the supply (liquidity) of the instruments is on such a scale to support world trade. For this, you need a mechanism to control the world gold price. Enter the Shanghai Gold Exchange. It will be a rudimentary process for China to increase the price of gold as to cause an arbitrage run and eventual default of the western paper gold markets. In such a crisis, the price of gold will run away and anyone not prepared will see the value of his or her paper holdings devalue in a rapid fashion.

What if China and Russia make a surprise announcement of rapidly increased gold reserves to cement confidence in their national currencies? They can also propose a new IMF structure based on the New Development Bank, built on an equitable foundation, as the worldwide solution to monetary order. Of the world’s top gold producers, BRICS represent:

  • Brazil – Number 11
  • Russia – Number 3
  • India – Not a significant amount
  • China – Number 1
  • South Africa – Number 6

With rapid inclusion of key member states, the New Development Bank can become a credible alternative to world financial order or a parallel financial system to the traditional western one.

As pointed out above, Gold always has been and always will be money. For the unprepared and distracted by political theatre, this lesson will be detrimental as we progress towards a global economic order.


This paper has been written as a roadmap for the uninitiated to what China is planning for its place in the world order. As such, the financial history of China and events leading up to today have been heavily abbreviated. The New World Order is unquestionably in play, but the rules of the game are not being dictated by the writers of the last episode in history. The new contenders in the ‘Great Game’ are defining their own rules. This paper has sought to connect the dots to deliver a narrative of what we see developing. The dots, thus connected, are loosely:

  • 2001 – China granted WTO membership
  • 2002 – Go West Program initiated in China
  • 2009 – RMB Internationalization begins
  • 2010 – Offshore markets start in Hong Kong
  • 2012 – Chinese companies start using RMB for trade finance
  • 2013 – Chinese RMB trade stands at 8% of currency trade. Over CNY 270 billion in bonds are issued (Dim Sum Bonds), RMB bank deposits reach RMB 100 billion in Hong Kong.
  • 2015 – The initiation of the harmonization of the financial institutions of the Shanghai Cooperation Organisation (SCO).
  • 2015 – Estimated that 1/3 of all Chinese trade settled in RMB. The RMB became the third most traded currency in the world after Euro and Dollar
  • 2017/18 – RMB to become full convertible currency Shanghai on a clear path to becoming a truly global financial centre

The critical dots to add:

  • IMF – Inclusion of the SDR / Voting rights
  • Regional Comprehensive Economic Partnership (read Eurasia or Globalisation strategy under the auspices of OBOR)
  • Full convertibility of the RMB
  • Gold – Shanghai Gold Exchange

The timing of the convertibility of the RMB will tell its own tale. The release of so much RMB on the world investment market will be a critical game changer, but where will this unrivalled level of surplus money migrate to? Again, it is all about the timing, as the Silk Road and Belt takes hold and embeds that timing will be critical to attract second level investment to the program, no doubt the Chinese government will encourage a ‘close to home’ approach and support the ‘motherland’ approach, the delay in full convertibility may actually be more orchestrated than first thought.

The end goal of China’s economic policy is increasingly evident. It seeks not to dominate the current petro dollar reserve currency system, but rather have an influential position in the next monetary world order. All the above described efforts are conscious policy to be ready for the next phase in world economic globalization. If China stays on track with its focus on equitable common goal of building the world economy, we may not need to fear China’s new economic order. Perhaps how the United States reacts to this challenge is where the fear should be directed.


[1], August 1973, Proposal for exchange of exhibitions with PRC in 1976.

[2]  Currency internationalisation: Analytical and policy issues, Hans Genberg. BIS paper No. 61.

[3] Boulding Kenneth. 1950, A reconstruction of economics.

[4] Bank of International Settlements, Working Paper, No 444, March 2014.

[5] SWIFT is not the only clearing network. Fedwire routes all USD denominated transactions in cooperation with SWIFT and UK has CHAPS .







[12] Author’s conversations with the Swedish Finance department re: AIIB further confirms this position.

[13] Asian Infrastructure Investment Bank Subscriptions and Voting Power of Member Countries, 22 September 2016.

[14] IBID.





[19] J. P. Morgan’s testimony, The justification of Wall Street. 18th December 1912

[20] Graphics:



[23] IMF Annual report 2016, P15.




Posted in ChinaComments Off on China’s Challenge to the World Economic Order

One China Policy Nonnegotiable, Says Beijing. America’s Adversarial Policy against China

The US and China: One Side is Losing, the Other is Winning

The one China policy was first mentioned in the Shanghai Communique on February 28, 1972 during Nixon’s visit to China – stressing the importance for both countries to normalize relations.

On January 1, 1979, the Joint Communique on the Establishment of Diplomatic Relations agreed to by Jimmy Carter and Deng Xiaoping formally established bilateral relations, ending official recognition of Taiwan, announced by Carter in December 1978.

The (1992 Consensus) one China principle affirms a single sovereign China comprised of the mainland and Taiwan.

Trump saying “(e)verything is under negotiation including one China” didn’t go down well in Beijing. On Saturday, its Foreign Ministry spokesman Lu Kang said it’s “nonnegotiable.”

One China alone exists, Taiwan an inalienable part of it, he stressed. The People’s Republic of China is its only legitimate government, “an internationally recognized fact, and no one can change it,” he explained.

We urge the relevant party in the United States to realize the high sensitivity of the Taiwan issue and abide by commitments made by previous US governments to the one China policy and the principles of the three joint communiques.

Normalized relations depend on it. If Trump demands Beijing play by Washington rules, trouble in the Pacific awaits him, perhaps undermining chances for improving relations with Moscow.

Sino/Russian ties stress unity. Each nation strategically supports the other. Together they’re a powerful counterweight to US hegemonic aims.

Harming the interests of one affects the other. Both countries will rally to defend each other’s mutual interests. Antagonizing Beijing by using the one China policy as a bargaining chip is sure to adversely affect Sino-Russia/US relations.

Trump has to decide if he wants mutual cooperation with other nations or continuation of adversarial relations with sovereign independent ones. Will he be a bully or responsible leader?

It’s his call for good or ill. Much depends on what he decides. China’s credibility at home and abroad depends on the one China policy.

It’s fundamentally important. Challenging or in any way disrupting it assures continuing Obama’s adversarial policy, maybe recklessly escalating it.

Posted in ChinaComments Off on One China Policy Nonnegotiable, Says Beijing. America’s Adversarial Policy against China

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