What does a competitor do when its outmatched? It develops and uses the superior techniques of its aggressor, and in so doing competes on more equitable ground.
That’s what Communist China has been doing since Deng Xiaoping took over from Mao in 1978. The specifics will be discussed here.
The downgrade of American debt has given the Chinese in Beijing the opportunity to hit the Americans for their addiction to debt. Beijing holds more US Treasure Bonds than any other country, and it is worried that it will be paid in US currency that is less valuable. The problem with such a view is that it is a CANARD, for Beijing is both pusher and user of the very fiscal and macro-economic techniques that the American’s are using.
The real reason for Beijing’s anger is the need for deflection. It wants to deflect domestic criticism for losses of $3.2 Trillion in foreign exchange reserves. So the misconception is that Beijing has righteous anger at the Americans devaluing their currency. How else to say it: Beijing is right, but for all the wrong reasons.
The People’s Bank of China (PBoC) has accumulated its reserves by taking excessing Chinese dollars out of circulation and purchasing U.S. Treasury bonds. Congress is only to happy to have the money to spend, since our own anemic growth cannot finance our own expenditures. This is the real political problem hitting Washington, and its already been defeated by Reagan and Supply Side Economics, otherwise known as ‘classical economics’ which has intellectual patrimony going back to Ibn Khaldun of 1300A.D.
Beijing’s fiscal grand strategy is to continue its own high cheap exports without creating inflation or appreciating its own dollar. Any hint of an increase in domestic consumption for Beijing means higher wages which Beijing does not want. So although Beijing want to continue its rapid productivity growth, it want to continue to do so without increasing domestic consumption or higher wage growth. It want its people poor and dependent! The political consequence of its policies must be studied, too bad many economists ignore the social impact of Keynesian craft.
The Chinese threat to stop buying U.S. Treasury’s is empty, for no other country has the liquidity or asset market to match the United States. If Beijing should try to divorce itself from having to find another country to empty its own excessive reserves in would choose Japan or Europe. But to do so would encourage protectionist backlash. The U.S. willingness to run a persistent trade deficit is the key to the dollar’s status as a reserve currency.
Nevertheless, Beijing really ought to pursue political strategies that make its own dollar convertible, therefore liberalizing its financial system so as to integrate China’s export demand system into the world economy. Communist China will not let that happen. There are just too many state run enterprises that benefit from state controlled export subsidies and cheap credit.
How else to put it: can China continue to devalue the effort its own people put into their own economy? Can Beijing continue to devalue its own dollar? Certainly Beijing thinks that the Laws of Economics don’t apply to them.
Remember, first comes hubris, then nemesis.