Sick Of ‘Dollars’, But What Else Is There?

If China wishes to ever throw off the shackles of the eurodollar system, and they do, to eventually go out on its own in an RMB dominated world there is a lot to cleanup long before that’s ever an attainable goal. To start with, we don’t know near enough about what’s going on inside that country’s financial and economic system. It would be a problem in any format, but inside one that has grown so far so fast it creates too much of an abiding interest in the darkside (exactly the eurodollar’s big problem).

To replace the “dollar” one must first offer to fix what’s broken, or at least realistically propose to overcome the current range of flaws (which are many). Information asymmetry is a deep and foreboding element intrinsically linked to how the eurodollar evolved. China’s yuan is simply too late to attempt to repeat the process.

As much as the Chinese system remains traditional, there is a lot about it that evokes the shadows of the West. Indeed, in RMB there is its own shadow system that is a relatively new phenomenon. Because of that, not much is known or understood about how it all fits together. That’s another big problem that inhibited the eurodollar’s recovery, for everyone had some idea what was going on in the shadows as far as trades and activities, but what wasn’t known was how all those individual connections made a big difference in the reverse.

One of those “dollar” connections was with China itself. Even after 2008, eurodollars flowed east (through Tokyo) and into the Middle Kingdom. Like peak housing bubble rationalizations, so long as China was growing nobody really cared about how the RMB sausage was made. Once China stopped growing, around 2012-13, suddenly risk mattered (just like once the housing market stopped, suddenly people started to care about things like subprime rehypothecated repo). As attention to risk grew, “dollar” flow quite naturally reacted in the inverse.

Unlike the eurodollar, however, RMB hasn’t yet undergone even a partial reckoning. There was no mass of defaults, no grand illiquidity episode that threatened China’s banking system to its core. It all came close to something like that in 2015-16, pulling back from the prospective brink just far enough. Rather than successfully end all questions, now raised the threat still lingers in popular imagination because the math, even partial as it is, doesn’t work out favorably over the long run. There is too much Japan to China.

China is often a maze of contradictions just like Japan used to be. This time, and what may be keeping China Inc. afloat so far, a lot of its big business is inextricably connected to the government at all levels. Sometimes failure really isn’t an option.