China to Open Bond Market to Foreign Investors

QUESTION: Mr. Armstrong; it is becoming obvious that China follows your advice to the last letter. That makes sense when you were the western adviser they flew in to Beijing during the 1997 crisis. You told them to bypass the primary dealers and demand to buy US debt directly and they did within 30 days. Everything you have advised they have done and now they have opened the bond market to foreign investors. Is this the step that makes China surpass the West?

ANSWER: Yes. It is a process. Europe would not listen to my warning that unless they consolidated the debt of all member states, then the euro could never compete against the dollar. In order for the Chinese yuan to become an actual reserve currency, there must be a bond market that is secure into which foreign capital can park. This was the missing link in Europe.

The fools who pretend to be analysts and kept saying that the yuan will defeat the dollar by merely trading commodities in yuan terms, are truly without any comprehension of how the world economy functions since they have no experience in the field whatsoever. They read newspapers and then think they understand when the newspapers have no expertise. You can price oil in yuan, but without a bond market, you instantly transfer your profits to dollars to park in treasuries.

Without a viable bond market, no currency can become the reserve currency and compete against the dollar. It does not matter what you price in yuan, it still requires a trustworthy place to park your money. This is basis fundamental international economics 101. Schools teach domestic economics and are generally ignorant of international economics. Those of us with experience tend to be traders working for institutions and sign confidentiality agreements so they never speak out. There is a huge gap between those of us who have been in the field and those on the outside looking in.