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China’s Increasingly Puzzling Relationship with the West

On the heels of the recent historic move made by the BRICS (Brazil, Russia, India, China, and South Africa) to launch a competitor to the World Bank and International Monetary Fund (IMF), another South American country—and current “foe” of the United States—wants to formally cooperate with China as well.

The central bank of Venezuela has formally agreed to cooperate and share information with the People’s Bank of China, with the parties signing an agreement last Friday to help “promote the exchange of information on statistical methodologies, monetary policy strategies, and funding mechanisms.”

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What this means could be anything from simply sharing central banking knowledge, experience, and ideas to perhaps a (more plausible?) continuation and expansion of the oft-discussed “anti-dollar campaign” that China and Russia have been engaged in recently. Moreover, many believe this also to be the case behind the recently established BRICS development bank.

According to Xinhua News, the governor of the People’s Bank of China has said that the agreement is a breakthrough for both sides to enhance economic ties, and that it is important for the two central banks to share experience, especially on monetary policies and financial stability.

China President Xi Jinping has been on a South American roadshow as of recently, hitting such countries as Brazil, Argentina, Venezuela, and Cuba. The main stop, of course, was the 2014 BRICS summit in Brazil held last week, while others in the region were said to help upgrade bilateral ties.

Whatever the true intent behind these recent moves by China, clearly the United States and the “West” (including, to a lesser extent, Japan) are now suddenly being treated more like the outcast instead of the most popular kid at school, especially where emerging economies are involved. This started well before the situation escalated in Ukraine, as quite possibly this all came to a head during the financial crisis of 2007–08.

Russia and China both have been in the news rather a lot in the past several years regarding this anti-dollar campaign. Many reports range from either China or Russia dumping U.S. Treasuries, or that the two countries will no longer engage each other via the almighty Petrodollar.

It is no secret that China has an incestuous relationship with the United States via a currency peg, trade imbalance, and a huge appetite for U.S. Treasuries. Moreover, the likelihood of that currency peg being unraveled very soon is no secret either, but what’s puzzling to many is why would China be attempting to devalue the U.S. dollar when it holds US$4 trillion? And why would U.S. businesses continue to open manufacturing in China if the whole model was about to flip on its head? It appears that a zero sum game is being played, and someone is going to lose big in the near future.

Obviously, none of these issues are small or lack significant future consequences, and yet the U.S. political elite have been uncharacteristically quiet about all of it, which makes it even more intriguing on a merely geo-political basis.

One can assume, though, that the Republican presidential candidate in the 2016 U.S. election will not miss the chance to use this to possibly defeat the potential Democrat successor. If there is one thing for certain about the United States and its economy, it’s that it relies heavily on being the world’s reserve currency. It’s doubtful that this position is one that will be relinquished without a fight.