Currency trends w/ Roger Williams

Casting financial predictions can be almost impossible, so try to follow currency trends, suggests Roger Williams

Hong Kong is currently outside of US sanctions against China. WIll that change if the autonomous region increases its use of cryptocurrencies?

As I have said before, no one can forecast with any precision – that includes the UK Treasury, The Bank of England, the Federal Reserve, the ECB and especially the IMF or the UK’s Office of Budget Responsibilities.

As elections loom, results of polls proliferate and forecasts are reported as facts. There is so much ‘noise’ you are lucky to see the signals. In this environment concentrate on the big factors in play. Here are mine at the moment:

Hong Kong

Though it contributes only three per cent of China’s trade (down from 11 per cent at the time of the UK handover), Hong Kong is China’s acceptable face of capitalism and ‘democracy’.

Economically, it is China’s largest ‘safe’ gateway for foreign investment and a relief valve for Chinese citizens to squirrel away or spend often ill-gotten gains. It is estimated that half of all Foreign Direct Investment into China comes through Hong Kong.

Most major Chinese listed companies have offices in Hong Kong and are listed on its exchange. A significant share of Chinese corporate debt is handled by Hong Kong’s banks. Hong Kong has judges running its courts who come from the UK and its ex-colonies and a respected corporate legal system.

Everything that China does to quell demonstrations in Hong Kong reminds people of its repressive regime, and China’s actions there will erode all the things that benefit China from Hong Kong.

Investors will not gloss over the requirement in Chinese law that requires all companies to respond to all questions from the Chinese Communist Party and the very direct link to government control à la Huawei.

Inward investment into China will suffer if Hong Kong suffers. Money flows downhill, away from trouble; trouble means potential for loss. The current Chinese credit squeeze and weakness of the Chinese banks will exacerbate if Hong Kong suffers. Already there are bank failures in China and more are expected.

Much of China’s dollar funding, some $128bn, comes through Hong Kong, which is currently outside of the US sanctions against China. By December, both houses in the US Congress are thought likely to pass the Hong Kong Human Rights and Democracy Act.

If the provisions of this proposed act are found to exist in Hong Kong then the country will lose its status outside of sanctions against China. 

China’s trouble in Hong Kong comes at a time when American attitudes to China are hardening. It is apparent now to all that China is a repressive and aggressive regime.

No longer addressed as ‘President’ by White House Officials, the Americans now refer to President Xi as ‘Head of the Communist Party’, drawing attention to his unelected, undemocratic status.

At every turn, China’s attempt to use its money to buy influence is being ‘tagged’ by US officials. This includes its moves to control British Steel and the negative impact of China’s Belt and Road initiative.

To make matters worse, news media is picking up on China’s role as a major polluter. Currently, under construction in China is coal-fired power generation nearly sufficient to power the whole of France.

Economies In Crisis

This is not a complete list, but you can curently include big South American countries, such as Argentina, Chile and Brazil as floundering financial states. In the rest of the world – and from a field sports perspective – it’s also worth keeping an eye on Turkey; it’s in the hospital.

Last year inflation was running at 25 per cent, the Turkish lira fell 40 per cent against the dollar and the country’s output fell 2.8 per cent in the last quarter. 

This year there has been growth in the first half of year – albeit modest – but the country’s debt level due in 2020 exceeds its foreign currency reserves so the light at the end of the tunnel might yet turn out to be a train.

This is a view no doubt held by Turks whose deposits held in foreign currencies have risen from just under 30 per cent to 50 per cent of all deposits.

Cryptocurrencies

The EU, US and the UK are all being lobbied to launch government-sponsored cryptocurrencies, with varying levels of success. The Chinese have said they will launch one.

Money is a complex topic from an economic standpoint because it is not just the printed stuff, it’s the money that is represented by such as government bonds and corporate debt instruments. Just by passing it around quickly, one creates more of it.

My worry here is government and big tech control; not control of money as much as further access and control of information and thereby of people. You can see from a Chinese perspective, a digital currency answers their prayers.

A country whose capital city has almost done away with paper money can adopt a crypto-currency very easily. Moreover, as China fails to displace the dollar as world reserve currency and most-trusted currency for world trade, a Chinese crypto-currency offers the potential to succeed.

Soon everyone in China will have an account for their social credits. An account not dissimilar to the ‘stars’ we used to be awarded in junior school with the modification that the Chinese social credits can be taken away for jaywalking or not visiting granny. How simple will it be for these social credits to become a crypto-currency? Knowing China, it will not be ‘Bitcoin-ing’ either.

It will not be restricted in supply and costly to ‘mine’ (create). The Communist Party will control it. The thought of such Big Brother control is frightening, but economically, it could shift world financial power away from the dollar.

The proliferation of ‘tap and go’ transactions in the UK is also particularly worrying. Moreover, cash has become the least popular payment method in the UK for the first time.

In 2013, cash (physical money) was used by UK shoppers for 27.6 per cent of all purchases with cards (credit and debit) accounting for 49.6 per cent. Last year, cash was used for 20.4 per cent with cards for 78.3 per cent of all purchases.

The banks tell us that this reflects consumer choice, and to a degree it does, but it is driven also by cost-cutting and the resultant closure of bank branches and cash machines. In 198, there were 20,583 bank branches in the UK; in January this year the number was down to just 7,586.

Add to this the move to online monthly tax reporting and you have the possibility of government as judge, jury and executioner when it comes to your financial affairs.

Furthermore, studies have shown that spending is more difficult to control with ‘tap and go’ and it has led particularly younger users to run up debts.

These three concerns all have a tendency to leave the world financial position in a more perilous position. Hong Kong has provided stability to China’s relationship with the two big economic power blocks of the USA and EU.

It acts as a brake on conflict and a compromise between communist ideals and capitalism, much to China’s advantage. Without it China’s aggression will not be so acceptable and trade will suffer and potentially world peace.

Developing nations in South America are feeling the strength of the US economy and its currency. This means instability in their currency and difficulties with servicing of their government debt and social unrest for some; world trade suffers.

A move towards cryptocurrencies does not help these negative trends for world trade but they are increasingly likely to garner acceptance by a world that relies on digital documentation and electronic payment.

I’m looking for a reassuring major trend but finding only concerns. I’m like capital flow, trying to avoid risk but finding all paths lead to it.

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