Is A Sino-US currency war imminent?

Since the subprime mortgage crisis in 2008, the Federal Reserve began to take an annual stress test for large financial institutions in the United States. The last four times they were tested went well, but the fifth test had two unusual results; the first is that the Federal Reserve predicted that the economy will take a sharp downturn in the second quarter of 2015. It is estimated that the economy and market capitalization will decrease at a rate of 5 percent and 50 percent, respectively. Likewise, the rate of unemployment will increase to more than 12 percent and housing prices will continually decrease by approximately 20 percent. All these predictions are much worse than the situation in the period of the subprime mortgage crisis. The second thing the Federal Reserve predicted is that the economies of China and other Asian countries will slow in growth.

How does the Federal Reserve describe the relationship between two unusual scenarios? The United States thinks that China's slower economic growth will lead to a great economic bust in the US, but it is obviously unreasonable. The United States is the biggest economy in the world and its economic development mainly depends on its domestic demand. During the past 100 years, external factors never became the cause of financial crisis in the US. The crises, including the Great Depression in 1929, the Great Stagflation in 1970s, and the Subprime Mortgage Crisis, were all caused by its internal factors. Instead, after the US became the biggest financial empire, other nations' economic crises has boost the US asset prices because all funds flow into the US. For example, during the five years of South-East Asia's financial crisis, 1 trillion dollars flowed into the United States, which boosted a new record-high in US stock markets. Therefore, China's slower economic growth will lead more money to the US and buy more US assets. So, how could US stock market go bust?

The real situation is that a big shock to the US economy will cause slower economic growth in China and other Asian countries, but "slower" is a nominal word. In fact, the Federal Reserve is producing a big reversal of the US dollar through flow global assets to the United States is aiming to break China's asset bubbles and create an economic crisis in China. However, because the US economy is not really recovered, the strong dollar policy characterized by the interest rate rising will possibly cause a big crash for the US asset price, which is precisely the worst situation predicted by the Federal Reserve.

Q: Why is the strong dollar policy only against China? Will it have the same impacts on other countries?

L: This is a good question. Why we say this policy is only against China is because a weapon employed in a currency war is not only the currency itself, but also geo-politics, the economy, trade policies, currency policy and even the media, among whom China is the US's prime target.

In terms of geo-politics, the United States is strategically shifting its attention to east. After withdrawing troops from Iraq and Afghanistan, the US has saved about 120 billion dollars in military expenses. But compared with the military expenses in 2012, there is no big difference in 2013, which means that US increased approximately USD 100 billion worth of military expenses in the West Pacific, especially near China.

At the same time, the United States shifts its eyes to South-East Asia. This policy, proposed by Secretary of State's Hillary Clinton in 2009. The main purpose of this policy is to prohibiting the internalization of the RMB. Secondly, the US and Japan show their cooperative relations and consensus on currency policy regarding the Diaoyu Island issue. The US acquiesced to depreciate the Japanese Yen, which locks up Japanese debt held by China at around USD 300 billion, which cost China USD 60 billion. Third, The United States established the Trans-Pacific Partnership, but excludes China from the partnership to prevent China from further integration with neighboring countries. Fourth, since 2005, the US has forced the appreciation of RMB by all means. So far, the RMB has appreciated by 20 percent against the USD, which attached hot money into China and in turn boosted Chinese asset bubbles. However, the US acquiesce to other currencies' depreciation instead.