The Peoples’ Republic of China has an Achilles Heel, a weakness in spite of her enormous strength that could be fatal to her survival as a vibrant, sovereign nation. That Achilles Heel, which since this past June has been visible for all the world, is also her golden chance to turn a crisis into an advantage not otherwise evident. Partly I refer to the ongoing crisis on the Shanghai Stock exchange and in the Shenzhen Exchange. Despite every conceivable and some not so conceivable government intervention, the fall in stock values since the market peaks earlier this year, has been estimated at some $5 trillion. That market crash, however, in my view is not the fundamental Achilles Heel China is threatened with today.
Yet it is precisely this crisis that opens the door for an alternative to China’s frustrating dollar dependency.
On broad economic issues, the Communist Party leadership under Xi Jinping has moved brilliantly since assuming office in November, 2012. President Xi’s One Belt, One Road project to buildup the rail and seaborne infrastructure of all Eurasia including Russia and the states of the Eurasian Economic Union will provide growing economic support to China and the entire Eurasian landmass for decades and beyond. China’s Asian Infrastructure Investment Bank–though with certain weaknesses such as the presence of too many US-dependent nations such as UK, Germany and France who might play the role of a Trojan Horse–is an otherwise solid step to create finance for the economic projects. So is the New Development Bank, sometimes referred to as the BRICS Bank.
The problem is that some in the Chinese policy leadership have too much respect or fascination for the Anglo-American finance model, with the Wall Street stock model, with the entire dollar system created in 1944 at Bretton Woods, New Hampshire. Beijing’s recent game to build and then to sustain a rising stock market, attracting the savings of tens of millions of Chinese first-time stock owners, has blown up in their face. That may well be to the long-term good. The thorough ongoing examination into what went “wrong” will no doubt lead to changes in the model.
The Government of China has been under increasing pressure from the west, especially from Washington, since China’s membership in the World Trade Organization in December, 2001, to make the Renminbi(RMB) a fully convertible currency. The US Government led the accession negotiations and imposed harsher terms on China than on any other developing economy. It represented a major surrender of economic sovereignty to join an organization whose rules China could not influence. China had to agree to allow Foreign Direct Investment, including into the sensitive state banking sector.
Until now, a cautious Government policy of gradualism has allowed China to avoid the traumatic shocks experienced in Poland, Ukraine, Russia under Yeltsin where US-backed “Economic Shock Therapy” was imposed in the 1990s. Now, however, China is at a decisive crossroad where basic review of the vulnerabilities is required if a growing and healthy economy is to be maintained.
The Government’s stated goal is to bring China into the basket of currencies known as Special Drawing Rights (SDRs) of the International Monetary Fund.
What will this bring to China? First it’s important to understand what the SDR is. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Today only four countries’ currencies make up the SDR basket: US dollar, Japanese Yen, British Pound, the Euro.
If it’s a matter of being recognized as having a fully convertible RMB, accepted internationally as freely as dollars or Euros, is acceptance into the SDR Club the best for China? While the status might feel nice, in economic terms it will bring little and at this point in time could expose China to new forms of financial warfare from an increasingly hostile west. Washington is working behind the scenes to block IMF reform that would give China its due voting weight in the Board of Directors proportional on her GDP. Again China is in an influential international organization where she has no influence and whose policies work against her national interests.
The error here is to believe that the Washington-steered IMF is a positive institution at this point. It is not. It has evolved during the 1980’s into a policeman for Washington and Wall Street banks. IMF “conditionalities” embodied in the so-called Washington Consensus rules are designed to be a supranational instrument of US foreign economic policies, a core part of what I call the Dollar System. The destructive role of the IMF in Russia in the 1990’s during the Yelstin era or in Argentina in the 1980’s indicate the problem.
Full RMB convertibility
The effort by China to make the RMB fully convertible is also embedded in the same strategic error inherent in trying to “reform” the IMF. Full currency convertibility for the next phase of China’s economic progress is not necessary and in fact not desireable. This is for one simple reason. The Bretton Woods Dollar System is a failure and is duly disintegrating from its internal flaws and its lack of transparency.
As far as I am able to see, the error of Beijing monetary strategy at present is to put acceptance of the RMB within the IMF’s SDR basket of currencies as a strategic aim in order to make the RMB fully convertible and ultimately accepted as another prime reserve currency beside the Yen, dollar, Euro or Pound Sterling. That’s a fallacy of composition, much as a blind man grabbing the elephant’s tail believing it to be a snake.
Each of the present four “elite” SDR currencies are there because of their geopolitical histories. Ultimately all are there because of their tie to the US dollar and the Dollar System behind it. That is the system that is disintegrating since the American financial crisis of 2007. To sacrifice her sovereignty, her monetary flexibillity to devalue or revalue the RMB, to open her financial markets completely to free foreign capital flows, is to expose China to dangers unimaginable.
Associated with that danger is the painful fact that today the Peoples’ Bank of China has the world’s largest central bank holdings of US dollar assets, an estimated $2 trillion. Most of that is in US Government debt or semi-piblic agency debt. When China reaches the point that she provokes Washington’s warhawks sufficiently, as did Russia, then we can be sure that the US Treasury’s new Office of Financial Terrorism draws up devastating new financial sanctions, freezes those $2 trillion in US assets, decides, as it did several years ago with Iran, to pressure the SWIFT interbank payments system to exclude all Chinese banks from the international dollar clearing system.
China’s leadership, under Deng Xiaoping, made a decision in 1978 to reform under what is known as “Reform & Opening Up” or “Socialism with Chinese Characteristics.” The essence of Deng Xiaoping’s Theory as he described in his writings was integration of the basic theory of Marxism-Leninism with the practice of modern China and the characteristics of the present era. It was to adapt a centralized communist China economy to “new historical conditions,” that is to gradually open up special zones of the economy to western market models.
During the course of Socialism with Chinese Characteristics, there has been a constant process of review by the highest levels of the Communist Party leadership of success and of failures. Now China is poised, following her damaging experience with open and US style stock markets and derivatives trading, margin stock purchases and the like, to fundamentally re-examine her current monetary and financial reform strategy. Here policies that seemed to be good for China in 2002 on entering the WTO, are being implemented in an entirely different new historical condition, namely that the USA hegemon is a bankrupt superpower which seems bent on war as a way out.
War today against Syria and the Middle East, against Russia, even a form of war against her EU NATO allies. It will be against China tomorrow, beginning with currency wars and financial and economic sanctions.
If this state of war, the Asia Pivot of President Obama, is ignored in China’s monetary reform process, China will be destroyed financially, even more than the Asian Tiger economies such as Indonesia, Malaysia or South Korea were in 1997-1998 Asia Crisis. The Asia Crisis was initiated by Washington and Wall Street hedge funds to destroy the Asia Tiger self-sufficient model, much as they had in the late 1980’s to destroy the Japanese economic success after the Plaza Accords were imposed on Japan, creating their financial bubble.
Significantly, at this moment China is still in a position to successfully adapt its reform process to this “new historical condition.” Rather than seek admission into “SDR Club” and the decaying western IMF institutional architecture dominated by the dollar, China is in a position to build its own international architecture with political and economic allies, not adversaries. China this year has catalyzed creation of the Asian Infrastructure Investment Bank and the BRICS New Development Bank. These two institutions, if they adopt the model of the IMF will become a harmless complement to the US’ IMF system with the World Bank and Asia Development Bank. That would be tragic.
Or China can create the seed crystal for a monetary system run by entirely different rules, rules that back necessary infrastructure developments at very low interest costs, foster natural organic agriculture across the nations of Asia and Eurasia, develop ecologically positive regions. Consciously doing so, rather than simply creating a “Chinese IMF” run by a different board of majority stockholders, would serve as a magnet for nations dissatisfied with the present inequitable Dollar System.
The golden chance that China now has is to take the reality of the collapsing, failed Dollar System into account in implementing, together with China’s cooperation partners, a new monetary ordering, a new architecture free of the inherent flaws of the old collapsing Dollar System. This of course requires a carefully thought-out strategy to deal with today’s new historical conditions.
F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”.