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This post was edited by abramicus at 2015-4-11 07:28|
THE GATHERING STORM IN THE EAST AND SOUTH CHINA SEAS
Sacrificing hundreds of billions of dollars in export earnings for three years in a row, China has made it a "NEW NORMAL" not just to have a declining though still impressive GDP growth rate that peaked at 14% five years ago to a mere 7% today, but also, and in return, the Chinese Yuan has been steadily appreciating against the world's sole international reserve currency, the dollar, for the same period of time. No doubt, the latter has been the cause of the former, as the international demand for the Yuan cannot possibly be that high. But, the trend is now set, and people are more than willing to accept it as a given that an investment in the Yuan is a safe store of value, and also a profitable investment, especially if you are a central bank looking for a place to park your money at.
The purpose of currency is to serve as a dependable store of value and as a universal medium of exchange, and in peace, China seems to have achieved this, with a GDP growth rate that has remained stellar, even if not cosmic.
However, to pass the final test of an international reserve currency, China must be able to preserve the value of the yuan and continue to use it as a medium of exchange with all countries, in times of war, not elsewhere, but involving her own sovereignty and security. Don't worry, such challenges have happened before. But, never have the stakes been as high. Not only would China's own sovereignty and security be at stake, but the whole regime of international currency reserves is at stake. If China wins, and this has to be militarily, then it gets to get the crown. If China loses, it loses everything.
This hypothetical scenario could be decades away, theoretically speaking. But if one were watching the news, this appears rather too close for comfort. In fact, it could unfold in a matter of a few months. Reading the news, it appears China has not yet not reached the point where it could win any major conflict. At best, it might salvage a truce, with concessions. All one needs is a Tonkin Incident, such as over Diaoyudao, or now, perhaps over the Mischief Reef (name sounds more appropriate for this kind of stuff), and China may just be forced to back down, and prove that it cannot physically defend its currency, as foreign banks would quickly sell of their Yuan "reserves".
Just as China was over-confident when it faced the smaller and less modernized Imperial Japanese Navy in the Yellow Sea, at the mouth of the Yalu River, in 1894, now 111 years later, it might still be defeated, perhaps for almost the same reasons, i.e., graft and corruption and betrayal from above. The current administration is doing all it can to root out corruption, but has it succeeded? The next war will tell. Historically, and informally, one can say that the likelihood of an over-confident force losing to a numerically smaller force is about 60%, or odds of 3:2, which is really alarming, as that would be equivalent to 1.5:1. You wouldn't play at any casino with odds that bad, even if you are a taipan.