The Boys in Beijing: Sinic Thoughts on Reform

The Chinese Communist Party is right to think that we’ve declared war.

We have after all destroyed THEIR export based political economy.  Now their faced with the difficult political choice of having to pursue domestic fiscal/monetary reform.

Why does this hurt?

Because it would be easier to just print more money, sterilize capital inflows and continue “screwing” their own population.  Hey, it works here state side!!

Here’s where the boys in Beijing hurt themselves:  government borrowing completely depleted the banking system’s capacity to lend to productive businesses.  An overt politicalization of bank lending has brought on the absolute necessity for reform.  This has social, political consequences which intrinsically threatens Beijing.  Watch the Peoples Bank of China ‘shadow-economy’ respond better to market signals than monolithic politically tied institutions.

The liquidity squeeze hitting China now has its origin in the Chinese Central Banks unwillingness to confront its own (politically based) policy of credit growth.  Watch the interbank lending market for accurate signaling. What all this means is that the boys in Beijing have mastered every political corner except the interior relation between money supply and bad loans in a downward spiral.  These are all crude measures left over from a planned economy.

Here’s what all central planners need to remember:  allow the market to price capital!

About William Holland

Systematic Theologian/International Relations
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