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China’s Biggest Money Problem : Who to trade with

Everyone says we have a global economy. Everyone talks about how the world has grown smaller as we trade goods and exchange currencies.

Maybe the world is about to get bigger again!

China has a money problem. Whenever China sells something to the United States, Japan, or any European Union country, it is losing money by the day. Lets consider the idea of a $10 hammer.

If china sold a $10 hammer to the United States in 2007, it received 10 USD. Between 2007 and 2008, if China did not exchange that USD back into RMB, it lost 1 out of every 8 dollars in the sale ( or $1.25 out of the $10 sale)

Now lets say that in 2008 they sold another $10 hammer to the United States. If they have not exchanged that USD to RMB yet, they have dropped another 10% in value or a little over $1 out of that $10 sale).

So from selling just two hammers for $20 to the US since 2007, China has lost over $3.25 from the first hammer and $1.25 for the second hammer. The result is that they only have about $15.25 of their initial value of the $20 sale to the US in just a 3 year period.

All signs point to the RMB drifting towards a 6 to 1 conversion rate in the next year. The cost of doing business with America is brutal for the Chinese. Every dollar of profit is disappearing due to the fall of the dollar.

Europe is the same devastating marketplace. The profits are being stolen by the drop in currencies.

What is the first evidence that China is growing tired of losing money in trades?

China bank halts swaps with some European banks

The first sign is that China will not allow countries to leverage their currencies by stuffing their treasuries with RMB. The next sign is that you will see private currency exchanges start to put larger buffers on exchanges for RMB. In other words, the RMB will be sold at a premium. The capitalist traders will not allow themselves to trade an appreciating asset for a depreciating asset without an extra cushion.

Then there is the next logical step. China will start to add more tariffs and taxes for goods from countries with weak currencies as a way to earn back the money that was stolen. You can see this in the recent taxes imposed on United States products to China.

105% on American chicken products

96.5% duty on certain types of nylon imports from the U.S

If a country starts to fight back against China’s import taxes, then China will most likely stop trading in the currency of that country.

Everyone needs to keep in mind that China has critical mass to generate its own growth machine. It does not need the help of countries like America or groups like Europe. Just recently China has become the largest consumer of beer and red wine in the world. Soon they will consume the most of EVERYTHING. Every company in the world should be seeking to establish a business relationship with a powerful person in China for the purpose of importing their product to China.

In addition to its own economy, it has a great relationship with India and Australia. This relationship has created a strength in both of their currencies.

In the end, it doesn’t really matter if Europe and America currencies fail. The trading will stop as the prices skyrocket. The central banks will falter and the economies will slip into a depression, but that will not cause that big of a ripple in China, India or Australia. Their trade will continue and their growth will continue.

If you take a look at my example above and consider that the cumulative currencies losses in trade with America since 2007.
This means the loss of over 100 billion dollars a year and it is growing cumulatively every day. It is not a matter of if they will move to stop the loss of wealth to the crash of the US dollar, but when they will stop the bleeding.

Itia (Abroad)

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