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Recently, the currencies of Asian countries have generally begun to depreciate sharply, among which the yen has fallen the most exaggeratedly, and the yen has depreciated by more than 50% against the dollar since the beginning of the US interest rate hike. Since the beginning of '24, Japan's exchange rate has depreciated by another 10% against the backdrop of interest rate hikes, and now, 1 dollar can only be exchanged for 158 yen, a new low in more than 30 years. At the same time, the currencies of Asian countries such as Japan, South Korea, India, and Vietnam are also experiencing a new round of sell-offs.
With tensions running high among Asia's central banks and a meeting between South Korea's and Japan's finance ministers on the sidelines of the G20 Spring Meetings, where both sides are uneasy about the current state of the won and the yen, is a new round of Asian currency defense about to begin? Is the Asian financial crisis of 1997 about to be repeated?
The real purpose of the US dollar rate hike
Every round of the US dollar tide is a harvest, the US interest rate hike allows capital to sell the currencies and assets of other countries, exchange them for US dollars and then flow back to the United States to seek high returns, which causes the assets of other countries to depreciate sharply, and then the US dollar then lowers interest rates backhanded, and then scatters the money to buy those high-quality assets that are mispriced because of the sale at a low price, the so-called harvest, so as to form a closed loop.
As far as the current situation is concerned, Japan and South Korea are already on the edge of a precipice, but as we all know, the ultimate goal of the United States is China.
Everything seems to be a coincidence, but all coincidences are deliberate. The day after U.S. Treasury Secretary Janet Yellen left China, international rating agencies downgraded China's sovereign credit rating from stable to negative;
Since July 2023, the Federal Reserve has kept the benchmark interest rate in the range of 5.25%-5.5%, which is the highest level since 23; at the end of 23, the Federal Reserve has released rumors that interest rates will be cut around March 2024, as soon as the news came out, the world was relieved at that time, but it didn't take long to be happy, and the script completely changed; JPMorgan Chase even publicly said that the United States was about to raise the benchmark interest rate to 8%.
In early April, the U.S. Department of Labor released data showing that U.S. non-farm payrolls grew much more than expected, with employment surging by 303,000, the largest increase since May '23.
The economic data of the United States is stable and improving, so there is no need for the United States to choose to cut interest rates at this time to save the economy, so the hawks have raised their heads again, which is also the direct fuse of this round of Asian monetary violence; and this non-farm payrolls data that has knocked down the expectation of interest rate cuts is itself beautiful and unreal, and it is clear that many large enterprises in the United States are now laying off workers, why are the employment data still so bright? Is it true that the data is fake?
We can't jump to conclusions, but politicians don't care about the objectivity of the data, they really care about whether the data can provide legitimacy to policy.
All indications prove that the Fed's current intention is to delay the rate cut. Although the high interest rate makes the United States very uncomfortable, and even if it is not good, it will reap the consequences and drag down the economic, fiscal and financial system of the United States, but the United States is still reluctant to cut interest rates because the real purpose of the US interest rate hike has not yet been achieved.
For dollar hegemony, there are three categories of countries in the world:
The first group is countries with a weak correlation with the dollar, such as Iran and Russia, which are both staunch supporters of de-dollarization, and the dollar's interest rate hikes and cuts have little impact on them;
The second category is countries in economically underdeveloped regions, such as those in Africa, which do not have many high-quality assets, and the United States cannot afford to gamble on its own domestic economy to compete for these flies;
The third group of countries is the countries that are mainly manufacturing and export-oriented, and these are ideal countries for dollar harvesting. The reason is simple, these countries are the most deeply bound to the dollar system, and the raw materials and commodities used in the manufacturing industry need to be purchased in dollars;
China strikes back and harvests
The countries of East Asia and South Asia generally belong to the third category of countries mentioned above, among the four major economies, India lacks the rule of law, it is difficult to get money in, and there are not many high-quality industrial and mining assets, and Japan and South Korea are the bastions of the United States' Asian strategy, and even if the United States is hungry, it will not easily kill the watchdog that has been raised for decades, so the high-speed development of China has become the fattest piece of meat in the eyes of the United States.
The U.S. is eyeing China, and the U.S. dollar bonds of Chinese real estate companies have become a directional blasting point for the U.S. side to China's assets. When domestic real estate companies borrow US dollar bonds, the interest rate is generally only about 4% to 7%, so domestic real estate companies have borrowed nearly a trillion US dollar bonds, and these debts have reached the time of repayment in the past two years, so the Federal Reserve has continued to raise interest rates since the first quarter of 2022.
Why did the US start raising interest rates at this time?
There are several reasons: the first is that the inflation problem in the United States in 2022 is very serious, of course, this is definitely not the main reason, the more important reason is the remaining two, the beginning of the Russia-Ukraine conflict in 2022 and the beginning of the Chinese property market.
The property market is sluggish, and real estate companies have no sales returns, and the dollar bonds may not be repaid, and if they can't pay back, then apply for late repayment, which is still feasible later, but the United States has begun to raise interest rates, and overseas rating agencies have downgraded the credit ratings of domestic real estate companies, so the dollar bonds of various real estate companies are lined up to explode;
The wishful thinking of American capital is to bankrupt these real estate companies, and the bankruptcy of real estate companies will cause a major blow to the confidence of home buyers, and the lack of purchasing power will further collapse the entire Chinese real estate industry, and finally leave a lot of bad debts for banks, and the financial industry will also collapse, and China's version of the financial crisis will follow.
China's growing strength has not set off America's wishful thinking, and our financial system is far less fragile than the United States had hoped.
The banking system, while dragged down by real estate, is now not systematically risky. China's property market has been unable to attack for a long time, and it is very difficult for the United States to short the yuan through this line.
In a fit of rage, the United States released news that it would continue to raise interest rates, hoping to bypass China's financial system and force the renminbi to depreciate directly through high interest rate differentials.
But since the beginning of 2024, the renminbi has depreciated by only about 0.5%, the lowest among major Asian economies. Among them, the central bank has actually made a great contribution.
First of all, in order to prevent the RMB from being shorted abroad, if an overseas institution borrows the RMB, the interest rate will exceed 6%, and such a high interest rate is to discourage those who want to borrow the RMB to sell and sell and short.
Moreover, even such a high wall still can't stop short capital, and China's own reserves are sufficient, and we have saved up $3.2 trillion in foreign exchange reserves for decades by relying on manufacturing exports.
China's foreign exchange reserves are the largest in the world. If anyone wants to smash China's exchange rate by selling a large amount of RMB, then the central bank will directly use foreign exchange reserves to buy back RMB, and we will buy as much as you sell, so as to stabilize the exchange rate.
In the past few years, the central bank has successively reduced its holdings of U.S. bonds by $545 billion, and the U.S. debt has exceeded $34.5 trillion, and the annual interest repayment expenditure of the United States exceeds the military spending of the United States.
Is it a pure coincidence that Yellen has increased her gold holdings and endorsed the renminbi, but China has not stopped reducing its holdings of U.S. bonds.
What American politicians cannot tolerate the most is not that we refuse to lend money to the United States, but that we lend our dollars to other countries. Some of the dollars that China has returned from reducing its holdings of U.S. debt have been lent to other developing countries to avoid defaulting on their dollar debts, and the debt that these countries owe to China can be slowly repaid in renminbi. The nominal interest rate of the renminbi is generally lower than that of the U.S. dollar, which indirectly reduces the debt pressure of these countries.
After replacing other countries' U.S. bonds with renminbi bonds, other countries will need to desperately earn renminbi to repay their debts, and in this way, the renminbi will also become more internationalized.
The other part of the dollars in China's hands can buy the underground assets of other countries for them after the United States smashes the hole, which is all dollars, and who is it not sold to?
This is equivalent to the United States pumping water from other countries, while China releases water to other countries, and the United States has made a nest of blood, and after a few days of fishing nets, it is found that there is a big hole underneath, and this is the core reason why the United States frequently visits China and exerts pressure on public opinion with sanctions.
The Asian financial war has begun
The situation facing the United States today is high inflation, high interest rates, and high fiscal deficits. Cutting interest rates as soon as possible will reduce the debt burden, thereby lowering the cost of financing for the U.S. real economy.
But the Fed only wants to complete a round of harvest before cutting interest rates, otherwise the hegemony of the dollar will be hit hard. For the Federal Reserve, the invincible harvesting routine, once it fails this time, not only will it be disgraced, but it will also be ineffective if it wants to use this routine in the future.
The source of hegemony and other rights is actually to create fear, and when fear disappears, hegemony is gone. Therefore, it can be said that if the US chooses to cut interest rates now and die down before the financial war, it will be a huge blow to the hegemony of the dollar.
Therefore, the United States is now gritting its teeth and not cutting interest rates, while providing liquidity to the US economy and continuing to issue additional Treasury bonds and expand the fiscal deficit.
However, the Fed's high interest rates are holding us back from cutting interest rates, and a sharp interest rate cut will widen the interest rate gap between China and the United States, resulting in capital outflows, which will outweigh the losses.
Therefore, before the financial war, China could only hold on and support key areas such as real estate through targeted water release.
In short, the two big countries of China and the United States are pulling to the limit, and the United States has been unable to attack it for a long time, so they retreated ten miles and sucked the blood of Asian countries such as Japan and South Korea, which is also the direct cause of the current round of Asian currency depreciation.
A few days ago, Blinken said in an interview: small countries must learn to stand in line, and also said that the country is not on the table, it is on the menu.
Ironically, even if they take sides, Japan and South Korea are not immune, they are politically and economically dependent on the United States, and even if they are obedient, they will not be spared the fate of being harvested. The yen can be said to have been blocked in a corner recently, and hedge funds are frantically shorting the yen, and Japan is likely to be the next target to be harvested.
The yen continues to depreciate, and the Bank of Japan suddenly announced an interest rate hike some time ago, ending the era of zero interest rates, hoping to stabilize the yen's exchange rate. The momentum of the Bank of Japan at that time made everyone quite nervous, and the result was that the thunder was heavy and the rain was small, and only 0.1% of the interest rate was raised.
If the donkey doesn't kick the tiger, the tiger doesn't know that the donkey is so weak, and the yen's trembling interest rate hike this time proves that the yen is a soft persimmon. As a result, international capital is more unscrupulous in shorting the yen.
Now that Japan has publicly announced that it wants to join forces with South Korea to fight a currency defense war, the won's reality is no better, and South Korea still has lingering fears about the American harvest more than 20 years ago.
In the 1997 Asian financial crisis, all of South Korea's big conglomerates were swallowed up by foreign capital, and Samsung, Hyundai, SK and other enterprises directly became foreign holdings, and since then they have become workers of Western capital; other Asian countries, such as the Philippines, have just raised interest rates by 25 basis points in March, and recently said that they will continue to raise interest rates in June.
Indonesia's central bank simply went straight to the market and bought a large number of Indonesian donnes, trying to buy the currency price of the Indonesian duon, and a battle to defend the Asian currency has begun.
The Sino-US financial showdown is also underway, and the United States is now able to carry one day at a time, and one by one, and who is the advantage?
How it turns out, let's stay tuned.
Source: "Overcapacity" or "Anxiety Overcapacity", National Bureau of Statistics, General Administration of Customs