John Ward China buying yen, selling dollars...ko for Japan and US, victory for Beijing.

GEOPOLITICS: China begins flexing its muscles against Japan and the US

As predicted many times by the Slog and others, soon China’s power to dictate will extend well beyond its own population.

Few nations include quite so much military and diplomatic strategy courses in their education systems as does China. Most of the ancient sayings on War emanate from China, perhaps the most celebrated of which is ‘Know your enemy’. This doesn’t mean ‘know who your enemies are’, but rather ‘know all about your enemy’s cultural strengths and weaknesses’.

But you don’t have to be a West Point graduate or 3rd Dynasty General to work out that Japan’s currency is too expensive for the nation’s export wellbeing – and America’s debt is a major problem for the US.

Until recently, China’s willingness to purchase US debt gave the Americans a security blanket which they began to abuse. As the Slog reported last month, China’s latest warning shot has been to announce that it is ‘diversifying out of US securities’. What’s become apparent today, however, is that the most likely target for Chinese investment is going to be in…..the Japanese Yen.

Japan today expressed concern about China’s recent sharp increase in purchases of Japanese government bonds (JGBs) in the latest of a series of sour notes in Sino-Japanese relations. Since diversifying away from American securities, Chinese net purchases of JGBs have been around Y2,300bn (£21 billion).

China’s purchases of JGBs is an especially sensitive issue as it exacerbates worries in Japan about the strengthening yen and its impact on the economy. And the geopolitical friction was highli9ghted this week when Tokyo and Beijing clashed following the Japanese arrested of a Chinese fishing boat captain in disputed waters.

“There is something unnatural about the fact that China can buy Japanese government bonds while Japan cannot [buy Chinese bonds],” Yoshihiko Noda, the Japanese finance minister said.

There is indeed. This not only makes Chinese imports to Japan cheaper – it also knocks out Japan as an Asian competitor. Equally, the growing diversification out of US debt (while it will make the Dollar cheaper) will still leave China a far cheaper exporter than America.)

Finally, the increased need for post-comfort blanket austerity in the States will make cheap Chinese imports even more attractive to the US consumer….and widen the trade gap still further.

Add all this to Beijing’s oxymoronic ‘managed float’ of the Yuan – it’s risen all of 0.6% since they went through the motions of floating it – and you don’t have to be paranoid to see a pattern emerging.

Chinese policymakers are smart, and they play the patriotic long game. So that’s three differences between it and the West’s business and political leaders. The politburo has no desire to destroy the West – that would be the world’s most expensive suicide trip.

But what they do want to do is turn most of the world into importers from China. Because once that process becomes a circular implosion, the circle will be as vicious for the West as it will be virtuous for the Chinese.

Please don’t take this as evidence of the Slog’s Sinophobia, by the way: it’s pure observation and conclusion – nothing more.

Related pieces: China calls time on US debt, Beijing denies debt diversification.