China: Currency Wars & Liberalization

China is best studied geographically as an island cut off from the world, its geography constitutes a political, social challenge as Beijing begins its own tapering in hope of liberalizing central banking to the effect of moving its domestic economy off from simple manufacturing.  This will not be easy, for China lacks strong institutional, cultural bulwarks that sustain a robust civil society.  By actually permitting a real civilian led market to develop, Beijing’s Communists want real price discovery so as to permit a stronger more authoritarian market to evolve.  My guess is this will fail.  But if Beijing wants taut strings to touch why should American’s blame them when we’ve already abandoned our own market based political economy.  If anyone thinks we’ve got an efficient market, their deluding themselves.

As Beijing continues to offer real deposit rates, it hopes to permit a level of manageable capital/equity formation among its citizens.  It’s also found the need to acknowledge that a managed economy is not an efficient one.  If China wishes to procure a real indigenous capitalist culture, its going to do so in a decentralized fashion.  This threatens Beijing, ironically its committed to a version of ‘fatal conceit’ that IT thinks Beijing can manage.

Let’s wait and see.

Here’s the consensus:  the case for further economic liberalization cannot be conceived in isolation.  This is the crux of Beijing’s problem.  Beijing conceives that economic liberalization through internationalizing its yuan, making it convertible, will incentivize its citizenry to deposit massive savings outside the ‘mainland’.

This will weaken the yuan!!

Another currency path of a depreciated yuan is China’s current account surplus, especially since most of China’s currency reserves our invested in foreign assets!!

The solution?

Beijing should seek the creation of private capital markets, deep international bond markets, embrace a true ‘cultural revolution’ by seeking the rule of law in the sanctity of contracts effectively permitting massive capital inflows.  Under this scenario, China’s real exchange rate would appreciate and China’s balance of payments would normalize.

Why is it that THIS scenario will NOT happen?

Because Communist Beijing will not tolerate the social/political impact of free market capitalism or free ideas; both which are necessary for a robust financial market.

What does the immediate future of China look like?

A managed socialist economy without true capitalist reforms will be a disaster for China and anyone participating in it; the slightest opening of capital markets in China risks a massive capital outflow depriving Chinese banks of funding.  We should note that as of this writing, the People’s Bank of China continues to accumulate foreign exchange reserves while supplying a pegged yuan at a predetermined level effectively sterilizing excess domestic reserves preventing inflation.

Beijing can expect to manage small changes in its political economy, but it will NEVER permit any political/social idea to threaten its hegemony.

About William Holland

Systematic Theologian/International Relations
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