The West is afraid of China: US Senators reject yuan as reserve currency, citing hacking

China is, by far, the economic superpower of today and is well positioned to lead the entire global FX industry within ten years.

This dynamic has rapidly taken its hold, and is now evident across all aspects of the FX industry from $200 million IBs with portfolio management facilities and enough resources to buy the Western FX firms, as LeapRate explained some six months ago, to whom they transfer order flow, to the interbank sector within which China is increasingly looking to participate globally.

Unlike the majority of the financial markets economies in free market nations, China differs in that its economic system is unique and blocked from the rest of the world. China’s population pays no income tax, and its companies pay no corporation tax, instead the Communist Party of China generates vast revenues from profits from the nations industrial and financial powerhouses and pays for the country’s development via that means instead of individual taxation – a facet that no nation can compete with.

China’s ability to establish new towns with several million population living in relative luxury within a matter of just a few years, with no venture capital funding and no corporate or personal debt, as witnessed by LeapRate last week, clearly demonstrates China’s future potential and commercial edge over the West.

This is clearly of concern to established nations with free market economies, and thus two US senators who have been the most vocal in accusing China of currency manipulation are now listing cyber espionage as a reason not to admit the Chinese yuan into an exclusive club of currencies that would elevate its status in the global economy.

China’s yuan, like all Chinese domestic, government controlled entities and commodities, is not valid outside China and is restricted to domestic use only, however the will demonstrated by China’s authorities to bring it into certain regions has manifested itself in recent establishment of clearing hubs for the yuan renminbi in Sydney, Australia, an area with very well established trade relationships with the Asia Pacific region.

Senators Charles E. Schumer, a Democrat based in New York and Lindsey O. Graham, a Republican Senator from South Carolina on Tuesday urged the International Monetary Fund to deny China’s effort to have the yuan recognized as a special reserve currency in the wake of a series of hacks against U.S. databases containing tens of millions of Americans’ personal data.

In their letter to IMF Managing Director Christine Lagarde, they pointed to a recently disclosed breach of up to 4 million current and former federal employees’ personal data – reportedly by China — as the latest example of “China’s rapacious actions that are aimed at disrupting the global economy and undermining the stability of international market participants.”

According to the Wall Street Journal, the Office of Personnel Management last week acknowledged that its networks were hacked in December, exposing the Social Security numbers, job performance and training records, among other data of millions of current and former workers. Earlier this year, several major health care companies acknowledged similar breaches, with tens of millions of Americans’ personal information exposed.

The Senators also were apparently referring to a series of cyber intrusions aimed at U.S. companies for purposes of commercial espionage – to steal trade secrets that would give Chinese industry a competitive advantage.

Though the United States has not officially accused Beijing of carrying out the hacks against OPM and the health companies, privately a number of U.S. officials have stated the Chinese government directed the OPM intrusion. And private cybersecurity researchers have linked China to the hacks of the health insurers.

Last week, China dismissed the allegations of hacking as “irresponsible and unscientific.”

The incidents “are just the latest in a litany of egregious actions, or inactions, that reflect the government’s lack of an ability to participate in an honest and transparent manner on the global stage,” the senators wrote.

A unique aspect of Chinese industry, which is an equal cause for concern for Western businesses is that the nation is blocked to the entire world, and blocks western business whether online or physical, however the government and the Chinese entities in which the Chinese government has a vested interest have bought manufacturing rights to pretty much every well known Western firm in existence to manufacture products in China for the domestic market.

Therefore, it is possible to see luxury items in every town in China from recognized brands, all made in China for the domestic audience, which highlights the need for western companies to gain royalties from Chinese entities, and also the power of the Chinese purchasing bodies.

In this industry, the global focus on the Chinese market, of which the surface has only been scratched in most cases, is a clear indicator of the realization of the old adage “if you can’t beat them, join them”, however this reaction by two government officials is an indication that there is some degree of fear that China may well become a world-encompassing economic superpower very shortly indeed.

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