While it is true that China’s holdings of US Treasuries have decreased over the course of 2018 and as such hit an annual low in October, this is not a trend unique to China in any way. Multiple holders of US Treasury Bonds have engaged in a sell off in the second half of 2018. This reality has seen Washington’s close geopolitical ally Japan becoming a net seller of US bonds at the end of the third quarter of 2018. Beyond this, while Russia is certainly not a Japanese style ally of the US, nor does Russia have the kind of meaningful trading relations with the US that China has and yet Moscow has joined with China and Japan to also sell off a substantial amount of US Treasuries this year. Thus, there is a clear trend among major nations to sell-off US Treasuries and thus, the trend cannot be characterised as specifically Chinese in nature. In many respects, quite the opposite is true.
The reasons for this global trend are twofold. As the US Federal Reserve’s policy to restrict the Dollar supply continues to create inflation in emerging markets and in Asian markets more widely, the Fed’s embrace of modest increases in interest rates which has only been compounded by the Trump White House’s policy of tariffs and sanctions on both friend, foe and neutral nations, has led to countries throughout the world seeking to prop up their own currencies by selling off their holdings of US Treasuries. Finally, with forecasts rife regarding a possible recession in 2019 that would hit not only already tanking US stocks and shares but also the US Dollar, some countries have sought to sell off some of their US Treasuries before the value of the Dollar might take a hit in the new year.
And yet China remains the world’s biggest single foreign buyer of US Treasury Bonds in spite of the trade war and as such is keeping the US Dollar from experiencing the kind of inflation that many other nations have experienced due to Washington’s policies throughout 2018. Therefore, there is perhaps an ironic win-win situation transpiring between China and the US in terms of monetary issues, even while bilateral relations continue to sour over both the trade war and the related kidnapping of Chinese national Meng Wanzhou in Canada on orders from Washington.
For China, the trade war has seen a modest decline in the value of the Renminbi. This has not necessarily been a bad thing as the declines have been more than manageable while they help to make Chinese exports more competitive in terms of price. At the same time, selling off US Treasuries has helped China’s currency not to sink to unacceptable levels. Yet by continuing to be the world’s largest holder of US Treasuries while avoiding what some had feared would be a “panic sell off” of US Treasuries, China has held the line and thus has avoided causing inflation in the US Dollar – something that would have been bad for US consumers of foreign goods (aka almost all US consumers), especially at a time when the form regressive taxation known as tariffs are already making imports less affordable for many Americans in spite of a strong Dollar.
While Donald Trump’s motto of “fire and fury” appears to apply as much to economics and trade as to military threats and “diplomacy”, China continues to pursue all forms of bilateral relations with a rational approach and steady hand. To understand what China has done in 2018, one must understand the broad scope of recent Chinese economic, industrial and monetary policy and how Beijing favours stability over risk and calm over panic in terms of the impact of policy measures on global markets.
The Chinese philosopher Confucius once said,
“It does not matter how slowly you go as long as you do not stop”.
It is this attitude that has helped China to not only transform itself since the reforms of 1978 but it is also this ethos which has helped China to provide the world a rock of stability in otherwise geopolitically uncertain times.
When Deng Xiaoping rose to the de-facto position of China’s paramount leader in 1978, the world as we know it in 2018 could scarcely have been envisaged. Indeed, in 1978 it was generally inconceivable that in Deng’s own lifetime the Soviet Union, then a rival to both China and the United States would collapse well before the dawn of the 21st century. Ironically, by the mid 1980s as Deng’s market socialist reforms begun to usher in a transformation of China from a society with 88% poverty at the end of the 1970s to an increasingly wealthy industrial power, some naive western observers felt that China rather than the USSR would be the first to abandon its political system.
In reality, the opposite happened. While Deng helped China to strengthen its political institutions and preserve its cultural characteristics within the framework of an ever more dynamic and modern economy, it was the Soviet leadership that allowed its political system to collapse, thus leading to a collapse of the entire Soviet and later the Russian economy as a whole.
One of the clear differences between China after the 1978 reforms and the USSR in the age of Gorbachev and his deputy Alexander Yakovlev, was that China never lost sight of long term goals and the gradualist approach required to achieve them. Here again, the wisdom of Confucius helped to inform the Chinese political method. According to Confucius,
“When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the action steps”.
Consequently, under the leadership of Deng, certain action steps were adjusted in order to make the economy work in a more effective way for the benefit of the people, while the USSR by contrast took an hysterical leap into the unknown of wholesale change without a clear goal in mind.
One of the major problems to face post-Soviet Russia was the immediate shift from a non-convertible national currency to one that was subject to immediate and extraordinary market pressures. During the USSR, ordinary Soviet citizens acquired goods through a non-convertible Rouble. This currency was effectively a government issued certificate for internal use that had no value outside of the USSR. When purchasing imported goods from abroad, Moscow issued a separate so-called “clearing Rouble”. As Soviet citizens could not legally own hard currencies, the non-convertible Rouble worked up until the collapse of the USSR when a new Russian Rouble created in 1992 became subject to the same market forces of more established currencies like the Dollar and Deutschmark.
The result was that ordinary Russian consumers went from having a currency that was worth something at home while being worthless abroad to one that had a value determined by international market forces that was close to worthless at home due to staggering rates of inflation.
By contrast, China only gradually transformed its de-facto internationally worthless Renminbi of the pre-1978 era to the internationally traded currency of today. After 1978, a duel-tracked currency system was introduced in China which saw a Soviet style Renminbi continue to be used domestically while foreign exchange certificates were issued for international consumers and investors.
As China worked to stabilise internal exchange rates throughout the last decades of the 20th century, it was only in the 21st century that the Renminbi was allowed to be legally traded outside of mainland China. After initiating the selling of Renminbi denominated Dim Sum Bonds outside of mainland China beginning in 2007, these bonds gradually became fully internationalised and in line with China’s robust economy, became a source of attraction for investors from the wider world.
After consecrating currency swap agreements with multiple partner nations, the Renminbi became fully internationalised and in 2015 the IMF incorporated the Chinese national currency into the Special Drawing Rights currency basket which also includes the US Dollar, Euro, British Pound Sterling and Japanese Yen.
A similar approach has been used in China in terms of preparing Renminbi to become a fully floating currency, although here too China has opted for a gradual rather than hysterical approach. China consequently seeks to avoid artificially pushing up the exchange rate (value) of Renminbi, not only because this would be bad for its export business but also because China is well aware of the troubles Japan got itself into by voluntarily allowing the Yen to over-appreciate after the 1985 Plaza accords. While the US today uses much the same rhetoric regarding an allegedly “undervalued” Renminbi as that which was used against Japan in the early 1980s, China does not plan to capitulate on any front, let alone in terms of caving to US pressure over the Renminbi. China has no plans to overvalue the Renminbi by allowing a free float which would likely lead to a higher value in the national currency. Likewise, China has no plans to artificially de-value the Renminbi either.
Instead, China aims for a stable national currency in order to avoid boom and bust cycles at home while also doing with the Renminbi what Japan could have never realistically done with the Yen – position itself to become the world’s future reserve currency. Furthermore, China’s managed float (which could easily be called a managed peg) of the Renminbi to other major currencies including the US Dollar, Korean Won, Japanese Yen, Euro and other less globally traded currencies will help the Renminbi to ease itself into its inevitable future position as the world’s major reserve currency.
At the same time, while not taking drastic moves to alter the value of its currency one way or another, China is working to gradually transform the Renminbi into the world’s de-facto reserve currency. As China’s overall GDP is set to overtake that of the US by 2040, as history indicates, the nation with the world’s largest economy will necessarily provide the world with it’s reserve currency. But far from siting and waiting for another forty years, China is already taking steps to entice other countries towards using its the Renminbi as a currency of bilateral international trade while the addition of Renminbi to the SDR currency basket in late 2015 has further underscored the role of China’s currency as a major player in international markets. This year’s launch of the so-called Petroyuan has further demonstrated that China is very serious about promoting its currency as an alternative to a US Dollar that while strong is increasingly volatile in terms of its reliability in international exchanges among nations targeted by sanctions and other economic pressures from Washington.
Trade is another area where China has shown that slow and steady wins the most important races. After opening up the economic to special economic zones (SEZs) in the 1980s that saw foreign direct investment spur the growth of domestic manufacturing, today, as China looks to export its own capital while importing ever more goods, China is promoting imports through events like the China International Import Expo and the establishment of strategically located free trading zones (FTZs).
China’s great reform of 1978 was made possible through the creation of special economic zones (SEZs) throughout the nation. By the mid 1980s China had created 20 such zones. Within each special economic zone, regulations such as taxation were drastically cut while these zones also welcomed foreign direct investment on highly attractive terms. The zones also served as China’s first foray into the free trade that increasingly defines Chinese mentality to a modern multilateral approach to globalisation with Chinese characteristics. Finally, because China’s special economic zones were and remain bedrocks of export driven commerce, these zones helped to transform China into the world’s industrial powerhouse that it is today.
Just as sure as the SEZs of the Deng era helped to transform all of China into the industrial and innovation powerhouse it is today, the creation of new free trade zones (FTZs) throughout strategic regions of China will help to transition the country into its next economic phase a a nation that opens its national doors to a world of trade, capital exchange, technical exchange and human connectivity.
As China looks to cultivate free trade agreements with multiple nations and in so doing helping to harmonise the ease of moving goods in multiple directions within the context of the Belt and Road initiative, China seeks not only to embrace free trade but to promote it as a means of accelerating economic growth among its partner nations by allowing them to both buy and sell their goods to important global markets in a less bureaucratically restrictive environment. As freer capital inflow and outflow arrangements will also be possible in the new FTZs, China will present the world a preview of future decades when an inevitably freely floating Renminbi will become ever more favoured as an international reverse currency and as a currency of international trade.
While China is opening up its entire geographical space to freer trade, by following the time tested method of setting up special zones to test both domestic attitudes and international attitudes towards the next phase in China’s economic development, Beijing continues to embrace a gradualist strategy that allows for the growing pains inherent in any new economic change to mature in a self-contained environment that can be easily monitored and legislatively amended depending on what challenges arise. It was this method that helped the SEZs of the 1980s transform the entire nation and thus when the new FTZs are fully operational, this too can be seen as a blueprint for future trading relations between all of China and its global partners.
In the same way that Deng’s opening up in 1978 helped to empower the people and put them on a path to a more materially fulfilling and socially enlightened future, Xi Jinping Thought on Socialism With Chinese Characteristics for a New Era looks to inspire future generations of globally minded innovators to put China at the heart of a world guided by the forces of peace through prosperity. At the core of Xi Jinping Thought is the principle that economic openness when managed effectively while simultaneously encouraging people driven innovation, can help to free people from cycles of economic exploitation and ensure a future in which development progresses on a sustainable model. This itself helps ensure a more stable economic future for the world as a whole as China looks to lead by example rather than through coercion. This serves to underscore the importance of mutual respect and transparency which helps developing nations to empower their own populations through participation in the Belt and Road initiative.
Furthermore, because the market socialist model of modern China prioritises balance between innovation and regulations that avoid boom and bust cycles, China is able to offer the world a viable and sustainable alternative to neo-liberal economic systems in which automation and the artificial intelligence revolution threatens the economic opportunities of ordinary people. When contrasted with the “race to the bottom” implicit in neo-liberal economic systems, the Chinese model at the core of Xi Jinping Thought allows for the wealth generated by the artificial hand to cycle back into the economy in the same way as profits generated by the human hand have been in the past. In this sense, China’s world renowned innovations in robotics and artificial intelligence will help to further enlighten the Chinese workforce while fostering a spirit of creation and innovation that does not come at the expense of socio-economic security. The FTZs are set to be a global showcase of this balanced modern model in action.
China likewise welcomes the creation of FTZs in its partner nations as such an arrangement will help to increase global connectivity projects within the framework of the Belt and Road initiative. In an age when the fate of one nation’s stock markets and one nation’s currency can have negative ramifications throughout the world, it is clear that the best way to overcome financial unilateralism is to pool the strengths of multiple economic powers acting in concert to create new means of material, cultural and human exchange. In achieving this, China has developed a model of economic openness that can harness the kinetic potential of multiple world economies so as to achieve win-win trading relationships that are more shielded from the pangs of distant markets.
The classic adage ‘show, don’t tell’, naturally applies to the new FTZs. While theoretical arguments can win minds, seeing theory spring to action can win real life adherents whose attraction to a new geo-economic mentality is best apprehended by seeing how such a system functions in daily life. In this sense, while the FTZs will be showcases of China’s latest innovations, China’s free trading zones will be a demonstrable example of the kind of future China seeks for itself and graciously recommends for partners who may be indecisive about their own future in an ever more inter-connected world.
Taken in totality, China’s approach has been one of moderation that has seen the implementation of history changing initiatives through gradual processes. Within the framework of these gradual processes, China is able to position itself as a global bedrock of geo-economic stability which given the sudden political shifts elsewhere, provides a great sense of assurance to bilateral partners across multiple continents.