It should not surprise anyone who understands Chinese monetary management techniques that Beijing yet again confirmed that the world’s second largest economy has no plans to artificially devalue its currency as a means of coping with the present trade war. Earlier this year Chinese Premier Li Keqiang delivered a speech in which he addressed the Chinese approach to an economic world order that is being challenged in multiple new ways. These challenges include the negative force of protectionism, political uncertainties in Europe and emerging markets in Asia that were hit by inflation over 2018. It is noteworthy that 2018’s inflationary trends in emerging markets were largely caused by US struggles with a contemporary version of the Triffin paradox – a phenomenon first brought to the attention of the wider world in a post-Bretton Woods age by Dr. Zhou Xiaochuan in 2009.
But while the United States Federal Reserve maintains a policy of manipulating the dollar in order to artificially create new or amend existing economic trends and while the policy of artificially pumping new money (in reality, weak money) into the economy in order to inflate one’s way out of periods of low growth remain popular short term economic “solutions” throughout the west, China takes very much more moderate approach to economic management.
An end to bloated fiscal stimulus
During his speech, Li made it clear that the era of intense fiscal stimulus has largely ended and that China’s new growth model will be based on pushing for the development of new industries, growth in the tech/innovation sectors and other areas of high quality industrial development.
One of the methods China will use to achieve this is through tax cuts and other regulation roll backs on entrepreneurial endeavours, whilst modest tax rises on the mega-rich will be used to stimulate sectors favoured by China’s ever growing middle class.
These policies will help to keep the Chinese economy honest, insofar as sensible regulation cuts and a tax regime based on reacting to existing trends whilst helping to shape short term development, is far more fiscally responsible than printing money in order to use the cash to prop up old industries or obsolete practices.
Ever since the Reform and Opening Up of 1978, China has aimed to and has largely succeeded in transforming renminbi from a non-convertible command currency, to one that continues to become fully integrated into the wider international system. To achieve this aim, China avoided both the monetary shock that impoverished Russia in the 1990s, whilst also avoiding attempts by external forces to manipulate renminbi’s value. In this sense, China learned from Japan’s mistakes of the mid 1980s when a rising yen led to a disastrous asset bubble.
Since 2015, renminbi has been included in the international Strategic Drawing Rights (SRDs) currency basket, thus representing a milestone for the Chinese currency. By operating renminbi’s exchange rate on an ultra modern managed float, China is able to reap the advantages of a truly independent currency whilst avoiding the temptations to consistently manipulate the value of its currency. This latter practice of endless currency manipulation has caused stress to the US and European economies in recent decades. By contrast, China has tended to avoid the phenomenon of boom and bust by remaining monetarily prudent.
In this sense, renminbi’s crawling peg against the dollar allows the US dollar to act as an asset in respect of partly determining renminbi’s partially fixed value. This contrasts with bilateral fixed exchange agreements that caused Breeton Woods to collapse in 1971, whilst leading to the Eurozone crisis ten years ago.
Chinese monetary moderation allows for a win-win mixture of flexibility and monetary discipline. This method has seen China securing a ‘best of all worlds’ combination of low inflation, low unemployment, high productivity and relatively low interest rates – something that has become impossible for many powerful western economies. Thus, China is able to take advantage of the virtues of a currency pegged to a de-facto asset while allowing for the free development of a renminbi that by the end of the 21st century, could likely become one of the world’s reserve currencies in the framework of a currency basket model that China favours along the liens set out in 2009 by Zhou Xiaochuan, the 11th Governor of the People’s Bank of China.
Ironically, the US accuses China of doing two things that have become increasingly commonplace in the US itself. First of all, the US accuses China of being a “currency manipulator” which is somewhat ironic as China’s managed float means that there are severe limitations on how much the People’s Bank of China can do anything to dramatically manipulate renminbi. Secondly, as the US Federal Reserve is the most prolific currency manipulator in modern economic history (especially since the 1970s), it is somewhat ironic that as China continues to exercise policies which tend to stabilise the US dollar, China should be accused of doing what actually is done in Washington. This remains true in spite of the comparative monetary conservatism of the current Fed Chief Jerome Powell.
China is also often accused by the US of using its fiscal policies to stimulate the growth of certain industries. China does in fact use various centrally controlled carrots and sticks to make sure that vital industries remain productive. That being said, in line with further and deeper reforms to the Chinese economy, China it pivoting increasingly towards a policy of using anti-regulatory measures to boost the productivity of businesses with the potential to thrive, while allowing internal market forces to determine future development trends in older industries where changing with the times is a vital requisite to long term sustainability.
While China looks to boost modern industrial innovators in fields including medical science, electronic vehicles and green energy production, it cannot be forgotten that the United States has a history of bailing out over-regulated and under-productive automotive companies and broken financial institutions – all at a substantial loss to the tax payer. Thus, while China invests in the future, the US does the same with its public purse, only all too often, these “investment” is more of a bail out than a genuine investment. To put it another way, China makes sound investments in the future while the fiscal stimulus model of Barack Obama (to give one prominent example) was based on doing damage control in respect of crises of the past.
In this sense, the Chinese market socialist model is one where private companies are responsible for their own failures but where the public benefits from successful companies bringing in large amounts of added value to the Chinese economy. The US model too could be called a kind of market socialism, only in the US, the losses that failed organisations make are socialised while the profits remain privatised and thus isolated from the real economic condition of millions of people.
The win-win mindset that is central to Xi Jinping Thought has helped China to remain on a consistently reformist path of development while avoiding the booms and busts that due to the size of China’s economy, could negatively impact on other partners including those throughout Asia, the Americas, Africa and Europe.
By allowing moderation to be a guiding force that helps to bring geo-economic stability in an age of dramatic geopolitical shifts, China is not only acting to secure the interests of its people, but also the interests of those in the wider world who are reliant on a rules based economic order that minimises surprises whilst insuring opportunities for multiple partners in trade and investment.